On Monday, the shares of struggling video game distributor GameStop skyrocketed: almost 145% in two hours. The gains quickly disappeared. Tesla CEO Elon Musk even joined the wave with a tweet. GameStop's shares rose by more than 60 percent outside of business hours on Tuesday.

The stock gained another more than 60 percent in trading ahead of Wall Street's opening on Wednesday, an increase of nearly 250 percent in three sessions. The week's gains are the latest episodes in a rally that saw the stock's total price climb more than 1,500 percent in January.

However, on Thursday, GameStop shares plummeted after online brokerage firms imposed trading restrictions, but they remained overwhelmingly favored stocks on Reddit's top trading forum on Thursday, according to Reuters.

Data about posts and comments on Reddit's Wallstreetbets, aggregated on swaggystocks.com, showed GameStop was by far the most discussed stock on the discussion group.

The stock's popularity is all the more surprising given that analysts are forecasting a loss of $465 million for 2020, on top of the $795 million it lost in 2019. The company was therefore a favorite target of short sellers like Citron, which believes that the group with 5,000 stores is overvalued, that its model is outdated, and recently announced a risk of imminent collapse of its share price.

But the opposite has happened. With GameStop shares soaring, short sellers pulled back and caused a short squeeze by buying back their positions at full speed, which multiplied the rise. Lemon's manager, Andrew Left, threw in the towel, posting from Twitter : "We won't comment on GameStop anymore, not because we don't believe in our investment thesis, but rather in the angry mob that owns those shares". He went on to say that his family had been "terrorized".

Three of the stocks pushed by traders recently, with GameStop spearheading the trend

So, what happened? To counter short sellers, that bet on the stock decline with short positions, a legion of individual investors rushed to take up call options. This army of small-portfolio investors was built up on social networks, on platforms such as Robinhood or on Reddit's WallStreetBets forum, which has more than two million subscribers. Their goal: to beat short sellers by launching thousands of buy orders on endangered stocks such as GameStop. They are nicknamed Robinhood investors or "Day traders".

"There was a massive short squeeze by small holders on a company that was the best selling company in the market because of its large debt. All it took was information from the WSJ for many blogs to start taking an interest in the company and launch a proper attack," explains John Plassard, investment specialist at Geneva-based private banking group Mirabaud.

A trend reinforced by the health crisis

This phenomenon is not new, but it is said to have intensified with the Covid crisis. "During the first containment, faced with the coronavirus pandemic and bored at home, many people turned to the stock market and engaged in 'day trading' for entertainment and profit," added Plassard in a report.

The containment and stimulus measures have enabled millions of Americans to receive aid checks, some of whom have decided to invest in the stock market. For example, the Robinhood trading application has seen the number of its subscribers explode, with +3 million in the first quarter of 2020. The reason for its success lies in the fact that it allows for zero commission trading in the USA, with an intuitive interface and an easy account opening process.

You can see in the table below how the US government checks were spent, and shares (Securities) are large beneficiaries. Other stocks that have seen their stock skyrocket under the action of these activists include Hertz, Plug Power, AMD and Nio.

Source: CNBC

This new trend could have many consequences, especially on short sellers, by forming a new counterweight. They must take this new reality into account in their models.

But this new generation of investors could also boost thematic ETFs, according to an analysis by Bloomberg. "Of the 15 thematic ETFs launched this year, several are looking at home investment trends, including the Roundhill Sports Betting & iGaming ETF (BETZ) and the Direxion's Work From Home (WFH) ETF. Catchy tickers, ease of trading and low fees are gaining followers".

The trading platforms believe that this new generation of investors is moving towards these funds, which often reflect the interests of young adults, such as sports, video games, but also issues related to global warming.

Source: © Bloomberg Trending Up

"There has been exceptional growth in small holders in 2020. The fact that hundreds of people have time on their hands during the lockdown has certainly brought some investors back. This is a clear trend, with 450,000 accounts opened between January and December 2020 to reach 1.25 million, with 75 million transactions executed across the entire flatexDEGIRO group," explains Julien Vallet, spokesman for DEGIRO France. He also notes that the average age of new customers is tending to get younger, around 20 for almost half of the new customers, compared to around 35 years in previous years. "This is notably due to the mobile application we offer and our rates, which facilitate investment, especially internationally". This trend is reflected in investment behavior. "The under 40's will choose rather international stocks, such as Virgin Galactic or Tesla. Those over 40 tend to choose national stocks, with the heavyweights like Airbus, Total and Renault.

Different situations in the USA and Europe

But the trend of Robin Hood investors may not continue, at least in Europe. A first unknown is how regulators will react to these new "manipulations".

Moreover, the existing regulations are not the same in the United States and in Europe, and some brakes on the old continent prevent the Robinhood application from progressing. The latter announced last August that an entry into the European market would be postponed "indefinitely", "which confirms concerns that its business model is not adapted to Europe", explains Martin Comtesse, analyst at Jefferies, in a report. A spokesman for the company said it would focus on strengthening its core business in the United States. "Robinhood's main source of revenue does not exist in Europe. In the absence of commission income in its home market, it relies heavily on generating revenue from order flow payment, a controversial practice of selling client orders to market makers such as Citadel Securities. Since this revenue stream is largely prohibited by European regulations, Robinhood's current business model is much less competitive," he notes.

Maxime Mathon, from independent analysis firm Alphavalue, notes however that there is an emotional dimension to the rise of these Robinhood traders: "Most of them are millennials who don't want certain stocks to disappear, out of nostalgia, like Nokia. It's a sectoral affective dimension". The Bureau believes that certain shorted "consumer brands" stocks in Europe such as Evotec, CD Projekt, Pearson, Hugo Boss or Bic could be the target of the Robinhoods.

But Mr Mathon believes that countries in the EU will not get to a situation like the United States, particularly because of regulatory constraints, but also because there are no short sellers there, and that there are therefore fewer “attacks” from these players on the old continent, except for a few targeted actions such as Casino. "Here, there is less awareness of this problem, so a revolt against short-sellers seems less likely to occur".

Some voices also believe that the amateurism of these new investors will be their undoing. Speaking on the U.S. CNBC news channel, Leon Cooperman, a billionaire investor and CEO of Omega Advisors, said that Robin Hood traders "are doing stupid things", and that this trend is only the result of "the gambling casinos being closed" and the fact that "the Fed is promising free money for the next two years". He concludes: "Let them speculate. Let them buy and trade. In my experience, this kind of thing will end in tears". To be continued...