None of this could have happened 30 years ago, in pre-internet times. A group of small investors on a subreddit called r/WallStreetBets banded together to buy stock in gaming retailer GameStop. They hoped that together they could elevate the stock price so that short sellers, including hedge funds and institutional investors, would ultimately lose money.
Social media analytics firm Talkwalker says that chatter around GameStop began on Reddit in mid-January, and the increasing mentions since correlate with rising share price. GameStop stock began the year at $17.25, began rising in mid-January to hit $347.51 on January 27. The r/WallStreetBets investors, who used retail trading apps such as Robinhood and Webull to buy the stock, were making money and having fun sticking it to the Wall Street establishment investors, who were losing money on their short sales.
“It’s super easy for a bunch of 25-year-olds to transfer $200 from their bank account to buy some GameStop stock, and the trades are free,” says Scott Tranter, the CEO of 0ptimus, a political data science firm that has provided market intelligence to hedge funds. “It’s like playing a video game on your phone.”
The same gang-buying behavior began to spread to other stocks. The prices of stocks such as American Airlines, AMC, Blackberry, Best Buy and Tootsie Roll began rising as more small buyers bought in.
On Thursday, Wall Street appeared to be closing ranks to slow down the rebellion. Robinhood, which offers free stock trades but makes millions selling trading data to hedge funds and institutional investors, said it was pausing sales of GameStop and 11 other stocks through its app. Brokerage houses began placing guardrails around buys of GameStop. The trading apps M1, Webull, and Public did the same, but all three said they were forced to do so because the clearing house they use, Apex, made it more expensive to process buys. Later Thursday, all three announced that they’d made agreements with Apex to allow the buying and selling of GameStop shares. Robinhood, which has its own clearing house, said it would resume buying of GameStop and other affected stocks on Friday.
Hedge funds are among the most destructive enterprises on Wall Street, often creating self-fulfilling prophecies of business failure that cause thousands to lose jobs while the traders and managers rake in big bucks. Moral of all of this: Hedge funds need much tighter regulation.
— Robert Reich (@RBReich) January 28, 2021
But the damage was done. The Empire struck back. GameStop stock lost 44% of its value during regular trading hours Thursday, closing down $152 at $193.60. Short sellers at least cut their losses, and r/WallStreetBets investors lost market value in their shares.
Naturally, the r/WallStreetBets traders were furious. “They have their Robinhood accounts where trades are free, and they thought this was a free market economy, and as soon as they make some money, all of a sudden this app stops them from making money and then these people go bonkers,” says Tranter.
The whole affair has the look and feel of class warfare, as many pointed out on Twitter.
“These GameStop traders don’t distinguish between hedge funds and the big banks that got bailed out after the 2008 crisis, and the banks that are screwing them on student loans, mortgage rates, and bank fees,” Tranter says. “These traders think it’s all just these rich people who rig the system and operate under a different set of rules when things don’t go their way—like with these GameStop trades.”
The strength of the r/WallStreetBets investors is in their numbers. Individually, they can play with much less money and much less risk.
If the stock price goes down, they’re only out a couple hundred dollars and can go to sleep knowing they did their part to stick it to The Man. They’re just buying and selling stocks. Few if any hold enough money in reserve to play the extremely risky short-sell game the hedge funds and institutional investors play.
But the cumulative effect of their actions is large, and a real threat to big funds.
This is unacceptable.
We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
The GameStop stock will eventually return to a price more in line with the real value of the company, but the hedge funds don’t have the luxury to wait. They have to close out their short-sell options every Friday. If the GameStop stock remains high on Friday, the big funds will be on the hook to pay for all the options they bought on the belief the stock would go down. That could cost millions.
Many of the r/WallStreetBets investor group say they plan to hold their GameStop positions at least until tomorrow. One large hedge fund, Melvin Capital, reportedly had to take an emergency loan to cover the cost of losses it took from short selling GameStop stock.
Robinhood’s halt on stock buys Thursday may have been good for the big funds, but not everybody agrees it was the right thing to do. One thing is clear: gang investing is legal and isn’t going to go away. Will Robinhood suddenly halt trading on certain stocks when this happens again?
The whole situation has attracted the attention of lawmakers including Rep. Alexandria Ocasio-Cortez, Sen. Ted Cruz, and Rep. Rashida Tlaib, and some are calling for Congressional hearings. The White House has said it is watching the situation closely.
“This . . . showed how the cards are stacked against the little guy in favor of billionaire Wall Street Traders, said Rep. Ro Khanna in a statement Thursday. “While retail trading in some cases, like on Robinhood, blocked the purchasing of GameStop, hedge funds were still allowed to trade the stock. We need more regulation and equality in the markets.”