Image credits: Clay Banks
News Article

How Does the GameStop Stock Frenzy Affect Mexico?

By Jorge Ramos Zwanziger | Thu, 02/04/2021 - 14:21

Short sellers suffered losses of nearly US$20 billion in January after the GameStop frenzy, reports CNBC. The company’s stock price skyrocketed by around 8,000 percent over six months, reports NBC News, after being valued for a few dollars throughout 2020. On Jan. 28, 2021, the stock peaked at over US$480, reports The Economist. GameStop has become the central game piece in a financial power struggle between a major hedge fund, Melvin Capital, and a Reddit forum, WallStreetBets, formed by a group of amateur stock traders with more than 2 million subscribers that encouraged each other to pile into the company’s shares, reports CNBC.


How Did This Happen?

It is called a ‘short sell’, which involves investors betting on which way a stock will go, either up or down. Usually, most investors follow the ‘buy low, sell high’ format, when it comes to stocks. However, short sellers do the opposite, they bet against a stock. Shorting a stock essentially means “borrowing shares from a broker and selling them, with the agreement that you will return the shares later. When the price falls, you buy back all the shares you had sold and pocket the difference,” reports The New York Times. For example, a hedge fund borrows stocks at US$10, they instantly sell them at US$10 and then wait for the stocks to go down in price. When the stock price drops, the hedge fund buys the amount they had borrowed in stocks at a lower price, profiting on the difference.

This time, however, the internet got in the way. With free trades available through platforms like Robinhood and E-Trade, stock amateurs from Reddit started buying shares of GameStop and they also started betting on the price, allowing them to buy stocks in the future. If the price of a stock rises, a trader can buy the stock or sell to get a profit. The brokers selling the stocks have to provide the shares, in case the trader wants to use either option. If enough traders get big, the demand can push the stock up, increasing its price, causing brokers to buy back shares. However, this further increases demand, pushing the stock price even higher, explains The New York Times. In the GameStop scenario, short selling has cost billions to different short-sellers. Why? Using the previous example, because they sold the stocks when they were US$10 but because the hedge borrowed them, it had to give them back. When they tried to buy them back, the share cost was much higher.


How Does This Affect Mexico?

It is all a matter of volatility. Delia Paredes, Executive Director of Banorte’s Economic Studies, explained to the Mexican Stock Exchange (BIVA) that this can lead to important regulation, reports El Financiero. According to Paredes, social media has taken a more significant role in daily activities. Luis Gonzalí, Co-Director of Investments at Franklin Templeton Mexico, also explained that the effects on Mexico are related to an increase in volatility, which could affect the impetus in the Mexican stock market, reports El Financiero.

An independent trader, Moisés Cortés, believes that in the short-term, the effects on Mexico are not going to be dramatic due to short selling not being popular in the Mexican stock market. However, he told El Financiero, this could be a stepping stone toward a change in the rules of the game, as many people are desperate to make a profit by taking advantage of highly volatile markets. “Everytime there are bubbles, like with Bitcoin’s volatility, we can argue of people’s desperation toward making profits because they are abandoning more safe-haven instruments,” said Cortés.

The data used in this article was sourced from:  
The Economist, The New York Times, El Financiero, NBC News, CNBC
Photo by:   Clay Banks, Unsplash
Jorge Ramos Zwanziger Jorge Ramos Zwanziger Junior Journalist and Industry Analyst