A NXT Conversation about GameStop


Big Crowd, Short Squeeze: Our Read on the GameStop Saga

How Digital Communities Operate in 2021

February 5, 2021
by Margo DunlapJim Kearney
Digital Communities-Globe-Sized

“Increasingly, digital communities are wielding the power of the collective to influence politics, the market, and culture,” it says in our NXT 2021 Trends Report, noting that digital communities were certain to be cast in a leading role in the drama of this year. The recent GameStop saga proved our prescience. To help interpret this event, we convened Margo Dunlap, our NXT Trend Research Group Lead, and Jim Kearney, Managing Principal in the Financial Services Consulting practice at EPAM, to talk it out. Both Dunlap and Kearney produced some useful insights, but there is much more to learn about today’s online communities. As our Trends Reports puts it: "This new era of digital community is a humbling reminder that the internet is still young, and we’re still just beginning to understand how it will evolve and the ways it will shape society."

Margo Dunlap

The whole r/WallStreetBets and GameStop scenario would have been impossible without the organizing power and scale of online communities. The reason retail traders had such power-in-numbers is because of the availability of digital tools and environments where they can go to align their strategies, don’t you think?

Jim Kearney

Groups like WallStreetBets can influence where people seek personal finance advice. They can ask: “Who has the best customer service for lending?” Or: “Which advisors, regardless of geography, are providing the best investment performance?”

Maybe your individual goal is to send your kid to the best college or to buy lakefront property. Why not go to a digital community and throw out the idea: “Who are you using to help you buy a second home or lakefront property?” It’s an opportunity to chat with like-minded individuals and it’s even better, in some cases, than talking to your friends because of the anonymity that most online forums provide. These types of groups work well because most people aren’t comfortable sharing their detailed personal finances with neighbors or friends.

One reason WallStreetBets has emerged as an example of a scaled social dynamic is because the stock market is a sort of algorithm that can be manipulated.


Tech is excited about the value of digital communities to brands, digital services, any sort of social online experience. It sounds like you do think that this applies to financial services, that beyond WallStreetBets there’s an important role for digital communities in financial services. Is that right?


Definitely. I think we’re already seeing it to some extent. The WallStreetBets story has been heavily publicized because of its scope, but there are chat rooms, internet bulletin boards, and other social platforms where these types of conversations are taking place.


Have you noticed that kind of scaling dynamic anywhere else in finance or FinTech?


Not yet. But thanks to WallStreetBets, you’ll likely see more people in smaller communities become more emboldened to push an agenda with a certain brand or a goal in mind. To counter that point, you’ll most likely see the different regulating bodies in the industry providing more oversight.


One reason WallStreetBets has emerged as an example of a scaled social dynamic is because the stock market is a sort of algorithm that can be manipulated. Another example we talked about in our NXT Trends Report were fan communities for BTS, who manipulate the algorithms that keep their band on the top of the charts. A third example: TikTok users messing around with the TikTok algorithm.


There's a lot of reward and excitement involved, and it's global in scope. You talk about the great example and impact with BTS in the music space. On the financial services front, there are so many different markets around the globe today. As a US investor, you historically viewed the trading day as 9:30 to 4:00 Eastern Time. Now the trading day is somewhat agnostic because trading is done after hours, and it's done across other markets around the globe. Think about the social influence that a digital community can have on the markets knowing that at any given time a global market is open.


Toward the end of last week, Robinhood and other sellers started restricting sales of GME and AMC, and international users—Canadian retail investors—came to the rescue of American retail investors with positions on GME. To buy.


I think Robinhood lost a lot of trust with its clients last week by halting trading on some specific stocks, like GameStop. It will be interesting to see how it builds that trust back up with its client base, especially considering its goal in democratizing finance for all.

What Robinhood is looking to do is very good. It's about learning to do more on your own. What it’s trying to accomplish, in terms of helping out retail investors understand investing from the ground up, is definitely a positive.

That said, by halting trades on some securities last week, Robinhood created a trust problem with its client base. The website says its products let you start investing at your own pace and on your own terms. That holds true…except when it doesn't, based on last week’s events. If I'm a Robinhood client today, I might think: “What if they halt trading on securities again at some point in the future?” A current Robinhood client might at least consider moving to other, more established online brokerages.

In Robinhood’s defense, it halted trading last week due to clearinghouse deposit requirements that support its clients’ trades between trade date and settle date. Due to the volatility of last week’s situation, the deposit requirements increased significantly, so Robinhood halted trading on those securities, like GameStop, that could drive that minimum requirement even higher. This makes sense but isn’t really the sign of a true fiduciary. It's putting the firm’s interests in front of the client’s interests, which obviously disadvantages the retail investor, as it did last week.

Interior Spot Illustrations3


Part of WallStreetBets’s appeal is that you’re playing out a strategy the community came up with. That’s what GME was—Reddit didn’t invent the strategy of trading on a short squeeze. It’s a well-known tactic that institutional investors use against each other.

But if you don’t have confidence that Robinhood, your trading platform, will allow you to play out investment strategies that rely on many people moving in concert, why would you stay with them? Why would you use them as a community? At the same time, Robinhood’s done a lot this week to explain itself to users. It’s doing a lot of outreach. And it’s raised a lot of investment capital from this situation.

Digital communities can not only push for people to make money, as we saw last week, but when done right, they can be an opportunity to share risk management tips and tricks.


On the website, Robinhood describes its services and says it’s taking on, in essence, a fiduciary role by putting client interest ahead of the firm’s interests. It talks about making investing more intuitive, more fun, regardless of your experience level.

Unfortunately, it really doesn’t do a good job defining investment and market risk. If you go to Robinhood.com right now, you’d see a section on the risks associated with investing. It’s two paragraphs, maybe 70 words. That's not exactly explaining all of the risks tied to investing, especially with a large-scale event such as the one that we saw last week.

Equities and fixed income is one thing, but Robinhood also allows you to invest in cryptocurrencies. It's a stretch for somebody who maybe doesn't know the difference between a stock and a bond to start talking and trading in crypto. I think Robinhood does have some fiduciary responsibility to its users and their welfare. The question is: How does it balance that and also look out for its own best interests as a firm?


Robinhood has faced some criticism for the way it’s designed its app, with its gamification and system of rewards. When you sign up for the app, if you invite someone else, you both get a stock, and that experience of getting a free stock comes as a scratch-ticket sort of experience—on the screen you use your finger to scratch off and reveal which stock you've won. When you make a trade, the messages from the app are: “Awesome! Fire emoji. Woohoo! Fire emoji. Your trade has gone through.” The user experience is really well done. It's lots of fun, but it's not emphasizing the risk of this kind of activity.


Digital communities can not only push for people to make money, as we saw last week, but when done right, they can be an opportunity to share risk management tips and tricks. Users could ask: “Why is investing in cryptocurrencies, as opposed to equities, so different?” If you’re not comfortable talking directly to someone—an investment advisor or broker or another professional in the space —you can hopefully get the same type of information, as long as it’s accurate, from a community of like-minded individuals. That would help with understanding the risks of investing in situations like last week, but again, the key is getting accurate information from the digital community.



The thing about the WallStreetBets community is that it's so heterogeneous. There were people participating in this for so many different reasons. We learned that the user who started the whole GameStop strategy, DeepF_ckingValue is his username, is actually in finance. He's a professional who knows what he's doing, as are many others on WallStreetBets. On the other hand, there’s a big percentage of the community that doesn’t have the same level of financial literacy, as you were saying earlier, Jim, and who are influenced by the activist aspects of the movement.


As we speak, I'm looking at the GameStop share price in the middle of the trading day (February 4) and it's down 30%, around $64 a share. If you're one of those novice investors that got in during the buying frenzy driven by WallStreetBets and you saw the share price go up to $350, you're getting excited thinking, “Man, investing is easy!” Flash-forward a few trading days and all of a sudden, you’re underwater wondering what happened. Some people can get too caught up in what the crowd is doing. This gets back to financial literacy and ensuring you understand what you're doing with your money before you jump into the water without a life preserver.

When you make a trade, the messages from the app are: “Awesome! Fire emoji. Woohoo! Fire emoji." It's lots of fun, but it's not emphasizing the risk of this kind of activity.


Absolutely. There’s also the tension between the activist- or principle-driven investors and the people who are in it because they're trying to make money. The mission-driven people are always going to be left holding the bag or holding the stock if you will.


It's a little akin to buyer beware. The people who started the movement, they knew what they were doing. They saw the price go up and I can pretty much guarantee you that they sold out at a very nice profit and are no longer in GameStop.

We’re seeing the blood coming out of this at the retail level. People are going to be frustrated and you might see some lawsuits. Some will go to the SEC and say, “You should have had better oversight; I should have never been able to do what I was able to do. I lost X number of dollars. You need to reimburse me for my losses.”

In many ways, this is just getting started. The legal and regulatory ramifications, looking backward at any type of fraud that took place in this event and looking forward to determine future oversight needs, are still to come.


Do you think it will end in regulation?


I think there'll be more oversight from the SEC. The question is: How does the SEC provide more oversight on retail investors and what they're doing via digital communities while allowing hedge funds, for example, to continue with a “business as usual” approach? That balance will ultimately define how Wall Street will look in the coming years.

filed in: NXT, financial services, digital design, complex systems

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