“The Squeeze of a Lifetime”: How a Group of Redditors F*cked Up Wall Street Short-Sellers in Their Own Game

Video game retailer GameStop became the talk of the stock market as a horde of small scale investors from Reddit took on the elites of Wall Street in their own game.

GameStop, a company that still sells physical copies of video games for different consoles became one of the most highly traded assets in the United States. GameStop’s stock price rose from $4 last summer to $20 at the end of last year. It then went for $40 a few weeks ago, and was worth around $100 – $300 at one point this week.

Probably more at the time I’m writing this.

But how did this happen?

A number of Redditors in the r/WallStreetBets subreddit analysed GameStop’s stock and realised that it’s price was undervalued. r/WallStreetBets is a pretty wild place. A place where stocks and memes meet – which can be daunting for someone who doesn’t have much of a clue about what goes on in the market. Vice describes it as “a subreddit filled with chaotic investment advice and surreal memes.”

In the span of a few months, they analysed and identified weaknesses in the strategies of several prominent hedge funds (Melvin Capital in particular) that had bet millions of dollars that GameStop and other companies would eventually fail as a business. Otherwise known as “shorting” certain companies that were predicted to fail, hedge funds and the short sellers analyse all sorts of companies and bet against them. 

Short sellers loan a certain company’s stock from someone, sell it to an investor, and then wait for that stock’s price to eventually go down. The short seller then buys them back for a smaller amount, return those stocks to the borrowers, and then keep the difference made.

But here’s a helpful three minute video that explains what short-selling exactly is.

Hedge funds have been doing this for a long time. By betting against a company, short sellers can put a downward pressure on the stock prices – meaning that a struggling company’s stock price can go down just because these big hedge funds pump millions of dollars to “short” them out.

The Redditors then set off a co-ordinated buying spree to buy as much GameStop stock (at a low price) as they could, which led to the sudden increase in stock price. This caused Melvin Capital, and the Wall Street big money people who invested money in them – to lose billions.

The hedge funds eventually found themselves in a feedback loop that instead drove prices upwards – what is also called a “short squeeze”.

Power to the people

The rich losing money?? At their own game?? How dare the everyday people do something that the elite’s been doing this entire time?!

So the horde of Redditors persisted in holding on to their stocks. As people held (or continue holding) on to their stocks and as the stock continues to go up, the short sellers haven’t been able to cover their initial shorts without locking in a lot of money.

Now given the fact that hedge funds make a ridiculous amount of money off of struggling businesses, hedge funds aren’t everyone’s favourite type of people. In fact, in the midst of the financial crisis, hedge funds were notoriously known to aggressively drive companies down by taking out billion dollar shorts. Something that financial regulators around the world took note of post the 2008 financial crisis.

There’s been an extensive amount of discourse over the whole thing, but many believe that r/WallStreetBets didn’t “manipulate” the market . The US Securities and Exchange Commission eventually announced that they were looking into the matter. While the Redditors were successful in pulling off such a stunt, experts don’t believe that their actions are likely to amount to “market manipulation”. However, regulators are worried that this co-ordinated activity may have created a bubble which could burst and cause losses for alot of investors.

As the media tries to explain what’s going on, and people on social media continue to follow the fiasco unfold, it should be noted that users in the forum posted information that was publicly made available. In doing so, they also conducted their own analyses to what they thought the stock would do. In short: basically what hedge funds do, the only difference is that this time the hedge funds were the ones feeling the loss.

Robinhood, and the irony behind the name

Popular zero-commission trading app Robinhood was at the heart of the GameStop situation. “The trading platform of the people” as it was seen to be, gave just about anyone a chance to play in the market.  However, Robinhood quickly became the enemy and pretty much became the opposite of what it preached out to be. Late on in the week, the app banned users from buying the stocks that the Redditors had initially taken on.

Rep. Alexandria Ocasio-Cortez, who is a member of the House Financial Services Committee, urged Congress to investigate the app about this decision. In a tweet put out hours after Robinhood’s decision, AOC stated that it was “unacceptable” and that she would be supporting a hearing if needed.

Silicon Valley progressive Rep. Ro Khanna also called for investigations to Robinhood’s decision. He  released a statement saying, “We’re done letting hedge fund billionaires treat the stock market like their personal playground, then taking their ball home as soon as they lose”. It’s still unclear if Congress plans on launching one anytime soon – but the topic is still being put out there.

Shortly after Robinhood’s decision, Redditors put up a new forum, r/ClassActionRobinHood, in an effort to coordinate for a lawsuit which gathered more than 30,000 users.

On the 29th of January, it was reported that a Robinhood customer filed a class action lawsuit againts the trading platform. The lawsuit claimed that Robinhood’s decision to barr traders from buying shares of GameStop rigged the market againts its customers.

The GameStop frenzy highlights a major absurdity in the stock market

As much as the memes you’ve probably come across say so, we’re not exactly witnessing the “downfall” of the Wall Street elites. Nor is it the “French Revolution of finance” as Donald Trump’s former communications director Anthony Scaramucci dramatically describes it.  What we are witnessing, is a large number of everyday people making a few thousand dollars at the expense of Wall Street’s elites.

In a New York Times interview, an Evangelical pastor and his wife who recently left her job made a $1,700 profit off of the GameStop stock this past week. To conclude, he described the feeling as “a catharsis to actually making money off their pain, a little bit”… But I think we’d appreciate how his wife bluntly puts it,
“eat the rich”.

Here’s a meme to summarise the entire thing.

So on that note, power to the people.
Peace.

Resources

https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html

https://www.theverge.com/platform/amp/2021/1/28/22254584/gamestop-robinhood-short-reddit-wallstreetbets-aoc-ted-cruz?utm_campaign=theverge&utm_content=chorus&utm_medium=social&utm_source=twitter&__twitter_impression=true

https://www.businessinsider.com/ro-khanna-slams-robinhood-trading-restriction-reddit-traders-amc-gamestop-2021-1?international=true&r=US&IR=T

https://edition.cnn.com/2021/01/28/investing/robinhood-gamestop-reddit/index.html

https://www.theguardian.com/business/2021/jan/28/gamestop-how-reddits-amateurs-tripped-wall-streets-short-sellers

https://www.vice.com/en/article/pkdvgy/send-this-to-anyone-who-wants-to-know-wtf-is-up-with-gamestop-stock

https://edition.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html

https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html

https://www.reuters.com/article/us-retail-trading-funds-analysis-idUSKBN29Y0I4?taid=6013ac9c7f7681000102dae7&utm_campaign=trueAnthem:+Trending+Content&utm_medium=trueAnthem&utm_source=twitter

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