A dangerous game in GameStop war

The mighty David-and-Goliath battle over GameStop was the last kind of drama to be expected to be played out in today's real world.

Such a massive confrontation would have been all but impossible not so long ago.

But over the past week or so, Wall Street and traders everywhere watched in amazement the seismic event that was made possible by the lightning-fast rise of social media, which has allowed unrelated individuals to come together to generate an unstoppable tsunami.

The battle was not just between David and Goliath - it was also akin to the Maoist strategy of so-called "people's war."

Rising investment and market intelligence platforms such as Robinhood, Stockaholics and Stockrants have drawn together small investors.

With GameStop, the platform pitched against it was Reddit, where members are used to sharing market intelligence and analysis.

A number of small investors responded to the analysis of one member and acted in concert to buy GameStop's stock with the knowledge that a Wall Street hedge fund had accumulated substantial short positions to bet on a downfall of GameStop.

To the surprise of nearly everybody, the concerted action by an ad-hoc group of amateur investors pushed GameStop's share price from less than US$20 a share at the beginning of the month to above US$30 on January 13, more than US$40 on January 21, nearly US$150 on January 26 and over US$340 as of January 27.

The Reddit members were betting that Melvin Capital Management, the hedge fund shorting on GameStop, would have to buy the stocks from them at high prices as a result of the squeeze due to a shortage of the stocks from other sources.

It was a gamble that had little to do with the true value of the video-game retailer.

The share price has been blown totally out of proportion to the high street store that sells physical box video games.

GameStop is a bubble doomed to burst unless it finds a new business model to sustain it.

What occurred was like a revolt by a group of Robinhood-style investors against the establishment by leveraging on the same playing field.

The squeeze on Melvin has played out well for them, but it forced the hedge fund to buy GameStop shares at unforgiving prices ,resulting in billions of dollars in losses.

The drama could be edging towards an end after market regulators stepped in with warnings they would investigate if there had been any breaches of the rules.

Reddit's service provider also reportedly took down the server-to-sever communications on the platform.

This gave rise to a sense of deja vu following Twitter's closure of Donald Trump's account and Amazon dropping Parler from its web-hosting service.

Looking forward, while the GameStop bubble is doomed to burst, it is hard to say when that will happen.

And will the bubble be mirrored in AMC Entertainment and Blackberry too? It is unlikely, though, to spill over to bigger stocks in view of the huge amount of capital involved.

The landscape of the financial market is being transformed by social media.