Words by Lovell Owiti
In simple terms, we break down the events that led to the largest Wall Street scandal since the 2008 financial crisis.
The Coronavirus Pandemic was meant to be the nail in the coffin for brick-and-mortar video game stores like GameStop. The American retailer was struggling to fight off competition from digital distributors, with consumers and producers like PlayStation turning to much cheaper and more profitable digital alternatives. Over a number of years, Wall Street hedge funds have been taking short positions on the company’s stock ($GME) in anticipation that it would dramatically fall in value. Their bets looked like they would pay off – until a Reddit user posted a daring trading idea in an investing forum called r/WallStreetBets.
Keith Gill, going by the name DeepF***ingValue, posted his position of $53,000 in call options (contracts that give an individual the right to buy a stock) on GameStop’s stock in 2019. Gill believed that the stock was heavily undervalued, and posted a very detailed report on his investment based on the fundamentals of the company and an in-depth technical analysis of their trading history – contrary to the view of “professional” investors, who believed it was a Hail Mary punt based on nothing but gut feeling.
Gill’s investment idea gradually gained traction in the forum, with thousands of Reddit users buying the stock. The big rise came in January, when Redditors pushed up the price after Citron Research released a report predicting the value of the stock would decrease. By January 27, the price of GameStop had soared, hitting just over $300 per share – an increase of 1500%. The next day, GameStop shares hit $483 – the highest price the stock had ever traded. Gill’s initial $53,000 investment turned into $49 million, and it is said many others who were early to the party made considerable profits, with several r/WallStreetBets users able to pay off college debts and buy houses with their earnings.
The r/WallStreetBets forum triggered a short squeeze in GameStop and other distressed companies feeling the pain from the pandemic, like AMC and Express. For those wondering, a short squeeze occurs when the price of a stock is pushed higher, forcing traders who have taken short positions (the selling of a stock in the hope it would fall in price) to buy shares in order to limit their losses. This, in turn, drives the stock price higher, hence why $GME and other meme stocks hit record highs. Those who had taken out short positions got a bloody nose, and it just so happened – to nobody’s surprise – that the short-sellers were overly represented by Wall Street hedge funds. Melvin Capital was among the hardest hit by the GameStop short squeeze, losing 53% of its total fund, and required a $2 billion cash injection from Point72’s Steve Cohen and Citadel’s Ken Griffin to stay afloat.
The short sellers were saved, however, by the brokers who suspended their users from buying several meme stocks like GameStop but who also didn’t stop the sale of said stocks. Most notably, the online brokerage platform Robinhood was the source of major outrage because it was the platform of choice for a lot of the r/WallStreetBets users. This had a massive impact on the price of the GameStop stock, effectively driving it down. This rightly enraged retail investors who felt hard done by and betrayed by a company that was supposedly designed for the benefit of the people. It was then revealed that Citadel – yes, the same hedge fund that bailed out Melvin Capital – is Robinhood’s largest customer, making millions from purchasing its order flows. This raised questions about possible collusion between Robinhood and Citadel to drive the price down. Due to the public backlash that ensued, the broker has delayed its IPO over fears its own stock would be shorted.
At the time of writing, the price of GameStop stock has dropped dramatically to under $100. It seems the show is over, but the story of the GameStop short squeeze raises questions over what this means for future of investing. With total losses reaching into the billions for Wall Street firms hit by their short positions, the power of a united union of retail investors can no longer be scoffed at. Over the last couple of weeks, we’ve seen a form of financial revolution, with retail investors who have always been bottom feeders in the market ecosystem rising up and sticking it to Wall Street.
For the first time, many retail investors made some real money – which is by no means a regular occurrence. Whether this event can be replicated really depends on whether the users of r/WallStreetBets and other online investment forums can stay united and disciplined, which is anyone’s guess given the trend-based nature of the internet. There is also the question of how accessible the market actually is for retail investors. Many online brokers offer free commission to sell users’ trading information or order flows to hedge funds – and with practices like this, it’s hard to see how access to the market is free and fair for all.
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