Goliath never fell, and those who called themselves the underdogs ‘David’ during the most recent Reddit-GameStop saga will have to look for a new metaphor. Although the battle of hedge funds vs. Redditors didn’t turn out victorious for the little guy whom many hoped it would be, there were many things to learn from this story.
In its current state, the stock market isn’t set to benefit the average consumer. On 21st January 2021, thousands of people, mostly inspired by social media decided to invest in the GameStop stock, driving the share price up from £13.06 at the beginning of 2021 to £31.21 and then up to £251.86 a week later. Most of the people did this because the hedge funds were largely ‘short selling’ the GameStop and others, which means they were betting the stocks, would reduce in price by a certain date. However, the banding together to increase the prices ruined the bets ultimately forcing the hedge funds to recoup their losses.
Essentially, the Redditors were investing in the failing stock, not because the people believed in GameStop as a great company, but because they were just looking for a way to manipulate the market to hurt the hedge funds. This resulted in mass outrage from many investors with allegations of foul play and increased demand for someone to stop the Redditors. But one thing we need to ask ourselves is: were the financial elites truly enraged about what happened or were they furious about who made it happen?
The technique that the Redditors used is referred to as a “short squeeze” and it isn’t new. It’s a common move that hedge fund CEOs have also used previously to damage their competitors, make money and manipulate the market. However, the new outrage is over who had made it happen. Big names in wall street can go at each other every once in a while and as long as it’s the hedge fund against itself, that’s okay because it means only the right players are in the game. But with GameStop’s controversy, common investors got involved and this moved money away from Wall Street into the pockets of everyday people.
As mentioned earlier, it’s referred to as a short squeeze, and it typically involves the financial elites betting on the way the stock would go – down or up. The investors purchasing the stock options or shares themselves usually place the bets.
The investors who bet against the shares are called the “shorts.” In GameStop’s scenario, the shorts were 2 big hedge funds.
Basically, shorting a stock means borrowing the shares from a broker and then sell them, with an agreement that you’d eventually return the shares. When the price drops, you can re-buy the shares and pocket the commission/difference. Keep in mind that shorting stocks is pretty risk; especially if the prices go up, you can suffer major losses.
Unfortunately, sometimes you can make a bad gamble. But you might also lose incase someone tries pushing up the process by buying many shares, although the company is not doing anything differently.
That’s A Squeeze.
Shorts need to close their current position – this means to buy up the stock they owe the brokers and return them. This increased demand pushes the stocks higher and the short that doesn’t take immediate action might be ruined.
Essentially, these types of standoffs usually involve complex Wall Street investors.
We experienced how much control the hedge funds have in the market in their immediate response to what the Redditors did. Purchases of GameStop as well as other “meme stocks” surged and then Robinhood and other programs often used to buy stocks restricted the buying of the stocks. “Meme stocks” trading also significantly slowed, the prices dropped and the hedge funds have enough time to plan a comeback. The abuse by Redditors was finally over and the hedge funds were able to reassert their control.
R/WallStreetBets is the name of the Reddit forum where it all started and their thousands of followers didn’t take down the hedge funds as they had hoped, but their actions sent a message – enough is enough. These Redditors collectively came together in order to rebuke the many years of malpractice by hedge fund executives and big names on Wall Street.
Although not catastrophic, the short squeeze that was executives by Redditors was a legit punch that almost ruined the hedge funds. This was a much-needed way to check the power that these executives yield over the stock market. It’s a wait-and-see game on how things will turn out, but Wall Street needs to rethink before they advantage of the ordinary person.
Story by Jon Sarlin Illustrations by Max Pepper and Will Mullery. (2021, January 30). Inside the Reddit army that’s crushing Wall Street. CNN. https://edition.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
Herbst-Bayliss, S., & Keidan, M. (2021, January 31). Analysis: To the brink and back on GameStop – Wall Street vs Reddit. U.S. https://www.reuters.com/article/us-retail-trading-funds-gamestop-analysi-idUSKBN2A00NI
Can anything stop GameStop? (2021, January 29). The New York Times – Breaking News, US News, World News and Videos. https://www.nytimes.com/2021/01/27/business/dealbook/reddit-wallstreetbets-gamestop.html