GameStop: It Won’t Die!
I wrote about GameStop (GameStop. Again, Really?) just two weeks ago when it first reemerged as the king of meme stocks. Like most people, I thought that all the excitement would go away within a few days after it failed to follow through and shed most of its gains. I should have realized that one of the characteristics of true meme stocks is that they, and the news surrounding them, are inherently unpredictable. Added to the fact that they don’t tend to follow the rules (whatever they are), they attract outsized attention from the press, traders, and regulators. They are like the B and C level celebrities that inhabit reality TV or the “10 best/worst” lists on the bottom of many sites — you just can’t ignore them. And it would be a mistake to do so, for although it’s tempting to dismiss meme stocks as too trivial or idiotic to merit serious attention or analysis, they can offer valuable insights into some of the most important changes that have occurred in the markets over the last few decades. And besides, meme stocks are here to stay, like it or not.
Keith Gill’s latest missive on Reddit, in which he posted a screenshot of his alleged GME positions (worth about $260 million in shares and options as of Monday’s close), is a case in point. I won’t go through all the gory details, as they have all been well-reported elsewhere, but suffice it to say that GME rallied 21% after his posting, which it is apt to do when he posts anything, no matter how opaque. Gill reportedly made $79 million on the one-day move; the next day, GME fell 5.4%.
The essential question is then whether Mr. Gill’s actions could constitute market manipulation, a “pump ‘n dump,” or not. As is the case with most interesting questions, the answer is not black or white, despite what the legions of YouTuber’s and social media influencers would have you believe. Again, this is a case where the developments in meme stocks is instructive and has implications for whether regulations have kept up with how information is disseminated in the 21st century.
You can research the exact definition of market manipulation for hours, but will come to the conclusion that the answer is more than a little vague. From the SEC: “Market manipulation is when someone artificially affects the supply or demand for a security (for example, causing stock prices to rise or to fall dramatically). Market manipulation may involve techniques including spreading false or misleading information about a company, engaging in a series of transactions to make a security appear more actively traded, and rigging quotes, prices, or trades to make it look like there is more or less demand for a security than is the case.” It can include attempts to profit by misleading the public through false statements or disclosures, insider information, or a coordinated and secret effort by several parties to influence the market. Since proving manipulation often goes to intent, and requires hard proof (communications, documentation), it’s a difficult case to bring.
How do the actions of Keith Gill fit into this? On one hand, you’re allowed to post your positions on social media. They are yours, and it’s up to you to do with them as you please. If you want to tell the whole world what’s in your account and how much money you’re making, fine, that’s your choice. If the post was indeed his position, then he wasn’t misinforming anyone, lying, or telling potential investors what to do. You could say that he was exercising his right of free expression. But if, on the other hand, you knew that you had outsized influence on the market, and your intent was to drive up prices, or the position was not just yours but included several other, coordinated investors, then the case becomes far murkier. Deceptive intent then becomes the crux of the case, but again, that’s very difficult to prove.
One thing the SEC or FINRA could hang their hat on is the concept of “momentum ignition,” or “…transactions in cross-product securities that manipulate the price of an underlying security, thereby influencing the price at which a market participant can either establish or close an overlying options position (e.g., marking the close, mini-manipulation).” In this case, that would entail buying the stock in an attempt to drive up its calls. Did Mr. Gill intend to do that, or did he just use multiple financial instruments to express his view? Good luck proving one or the other.
The other possible plan of attack is to prove that Mr. Gill’s positions are not wholly his own, that they are the result of secret coordination between several investors. Then a case could possibly be made that he attempted to mislead investors by failing to provide adequate disclosures. This is not that farfetched. Mr. Gill has a very large position and it’s unclear where he came up with all the money in the first place.
In Gill’s favor is one very important fact: apparently, he hasn’t sold anything. If he had initiated the position, posted, watched the market go nuts, and then sold the position, manipulation would be much easier to prove. As is, it looks like he likes (loves) GME and has amassed a giant position to express his view. Of course, getting out without freaking out the market will be the tough part.
The natural defense to charges of manipulation, this case included, is that it has always been practiced by well-established institutional players, and that meme stock investors are just doing what the great and the good have always been doing. Maybe, maybe not. One of the differences here is that most Wall St. pundits, even the most well-known and publicized, don’t have a 100% track record on driving an individual stock higher by just posting or saying something (however inane or inscrutable). Also, and even if the assertion is true that manipulation is common on Wall St., that doesn’t automatically make Mr. Gill innocent. If you and everyone else are doing 85 mph, and you happen to get pulled over by the police, you’re still guilty of speeding.
However, given Gill’s stature as the King of Memes and the voice of the anti-Wall St. populist movement, the SEC better be absolutely sure if they charge him with manipulation. Personally, I think the case is too unclear for them to do so. They could spend their time more productively by clarifying the regulations surrounding market manipulation in the age of social media, mass retail participation, and non-traditional influencers. Mr. Gill may be the first, but he will not be the last.
I hasten to point out that I am not a securities attorney nor giving legal advice. The object of my analysis is to promote discussion and provide relevant research on the matter.