One of the biggest stories in tech and finance over the past few weeks revolves around GameStop’s stocks. But as much as everyone has been talking about the stock and how it has Wall Street up in arms, few people, especially here in the Philippines, really understand what’s going on.
Even our writers at Variable find the GameStop frenzy interesting. They’re eager to understand the finer details of the story—what a short is, why retail investors are betting on these stocks and, more importantly, what role tech plays in all this.
What exactly happened with GameStop and Wall Street
Last week, GameStop headlined the news after retail investors caused the company’s stock to surge, following a coordinated effort to squeeze short sellers.
But for us to understand how this came to be, it’s best to start with knowing what short selling is.
Short selling is a strategy used by investors where they borrow shares of a stock they believe will drop and sell them afterward. Once the value of that stock drops, they repurchase those shares to return them to whoever they borrowed them from. As they are buying back the shares at a much lower price, they end up gaining a huge profit in the process.
This was what hedge funds were seeking to do with the stock of GameStop. The company, the largest video game retailer in the U.S. (think of it as their version of our DataBlitz), has fallen on hard times, as more and more gamers switch to digital purchases. This made it a prime target for short selling, which hedge funds betting GameStop’s stock value would crash.
But things took an interesting turn when the news broke out in the r/WallStreetBets subreddit, a community of retail investors. Some members have nostalgic ties to GameStop, having bought games there growing up. At the same time, recent changes to the company, including a significant investment by pet-food entrepreneur Ryan Cohen, led many in the subreddit to believe that its stock was undervalued. Seeing as the company was about to be shorted, many in the subreddit started buying GameStop stock, as well as other stocks of other companies that hedge funds were looking to short.
The resulting purchases caused the share prices of GameStop, as well as the other “meme stocks” that the redditors had invested in, to skyrocket. This created a “short squeeze,” where the hedge funds shorting the stocks were now losing money as they had to buy them back as a loss.
This is where the retail trading app Robinhood comes into the picture. The trading app allowed people in the r/WallStreetBets subreddit to invest in GameStop and other meme stocks, without using traditional brokerages. Robinhood states that its mission is to “provide everyone with access to the financial markets, not just the wealthy.” It does so by making money from interest earned on customer’s cash balances, margin lending and selling order information.
Can this happen in the Philippines?
For PayMongo COO Edwin Lacierda, notable differences exist in the local stock market that make things a bit more difficult compared to Wall Street. For one, unlike in the U.S., a much smaller portion of our population invests in stocks.
“How many investors are there anyway? Kakaunti eh [only a few],” Lacierda points out.
He estimated that less than 10 percent of the population invests in stocks. This is important as having a large number of traders is how Robinhood makes money.
“The way that Robinhood did that was to make money from the market maker,” explains Lacierda. “That’s a whole new revenue model that they’re doing. The margins are very low—sometimes just a penny or two.”
It’s only through the sheer volume of transactions—the company currently serves around 13 million users—that Robinhood is able to make money from such low margins. Here in the Philippines, a much smaller number of people are investing in the stock market. At the same time, many of these people are also not investing directly. Instead, they’re investing in mutual funds.
“That’s the kind of market we have right now,” he says. “That’s also consistent with the fact that we are largely unbanked.”
Indeed, while the number of Filipinos with bank accounts is growing, a survey by Bangko Sentral ng Pilipinas from July of last year showed that 71% of Filipino adults still did not have one.
“Talking about financial literacy, we’re really just low there,” he adds, noting that they’ve also faced a similar problem in PayMongo.
The low number of people participating in the stock market also means that, even if a Robinhood-style service came to the country, a similar deluge of retail buyers coming together to influence it may not happen.
“You won’t see a deluge of people in the Philippines doing something similar to what we see in the U.S.”
Can someone still come in and disrupt the stock market?
Even with all the challenges posed by the Philippine stock market, it doesn’t mean that a startup can’t come in and disrupt the market in a manner similar to Robinhood.
The key, according to Lacierda, is to find a “pain point” in the current system and be able to address that with technology. He says that it is possible that, even if only a relatively small number of people are investing in the stock market, a new, disruptive startup could be what opens it to a larger audience.
Lacierda uses PayMongo’s own experience as an example of this. Before the company’s entry into the market, the existing electronic providers focused mainly on large enterprise merchants that already had existing websites. In this landscape, PayMongo realized that not focusing on smaller merchants had created a pain point in the industry that they could address.
Going back to the stock market, Lacierda says that, as people become more financially literate, they’ll start seeing the pain points in it. Should a startup figure out a way to address these pain points in a way that will still make them money, then that could open up the local stock market the way Robinhood has Wall Street.
“If you study the market well, if you know the pain points, then that’s it. Your problem now is if the market is big enough,” he says.
“Are you willing to take a bet? It’s up to you.”
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