ALGORITHMIC COLLUSION? NO, THANKS: THE GME CASE

by Davide Bellucci

If competing companies’ managers meet in a room behind closed door to discuss and coordinate about their future strategies, they infringe the law. They can be accused to form a cartel, which is illegal. A cartel is a secret agreement between competing firms which coordinate on strategies to manipulate the market and gain supra-competitive profits. Consumers and other firms pay the bill. Competition authorities around the world struggle to uncover and fight cartels as they are kept secret: colluding managers hide their misbehavior, and it is difficult to observe its effects in the market. Further, collusion usually occurs among few players: the higher the number of participants, the harder to find a focal point, the harder to maintain it and to discover deviators.

GameStop (GME) stocks jumped from less than 40$ per stock on January 22 to around 450$ on January 28. A tenfold increase in less than a week. Company’s fundamentals had nothing to do with that. Nor investors’ expectations about future cash flows or earnings. Everything started when rumors about hedge funds’ intentions to short GME stock leaked. Thousands of small investors reacted and coordinated in a massive pump and dump strategy through the Reddit platform, making them gain the appellative of “redditors army”.

What has happened gives rise to some thoughts. According to the Security and Exchange Commission’s (SEC) definition, market manipulation is an activity “to effect, alone or with 1 or more other persons, a series of transactions in any security … creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”

The GME pump and dump strategy shares some features with collusion for the purpose of market manipulation. Investors coordinated their decisions, and they did it to artificially manipulate the price of a stock and gain money. Under this perspective, the GME case can be thought of as a new form of collusion. A form of collusion from the bottom.

However, its distinctive aspects make the story peculiar and intriguing. Investors were not a few, but thousands. Redditors were not rivals nor competitors. The pump and dump strategy was not secret. Everybody knew that there was a pump and dump going on and that the price was bubbling just because of this. Everybody was aware it was a bluff. Everybody who decided to jump in or jump out from the GME boat was not deceived by false information.

Digitalization makes the boundaries between what is legal and what is not more fluid and fuzzier. The GME case reveals that this may also happen through unpredicted mechanisms. The antitrust community is wondering whether we should intervene to prevent oligopolists from delegating marketing decisions to algorithms. We now discover that ICTs, and in particular social networks and apps, are apt to coordinated decisions made by a multitude of people. Many legal and economic experts do not share equal views on whether these forms of bottom coordination are equally to blame. For sure, the GME case made clear the need for new regulations in the sector. But is there any way to control or deter the occurrence of such events? Is it really possible to design regulations that ensure that what happened will never happen again? Food for thought for regulators.