A Redditor and a Hedge Fund Manager Walk Into a GameStop…

by Kiran Subramanian ’21

Source: Imgur

Published Feb. 14th, 2021

In the tales of Robin Hood, the fictional character was famous for stealing from the rich and giving their money to the poor. To accomplish this, Robin Hood used a multitude of tricks and disguises, among other methods. Now, a Robin Hood-esque tale is unfolding in real life as very rich individuals find their plans ruined by average citizens.

Essentially, a ground-shaking event in the Wall Street world caused many rich individuals to lose sums of money in a way that they did not foresee. 

Many hedge fund people rely on a method called shorting to make money in the stock market. According to the Chicago Tribune, “In a short sale, they borrow a share of GameStop and then sell it. Later, if the stock price does as they expect, they can buy the stock at a lower price and keep the difference.” While it may only make back a small amount of money, do this multiple times, and one can make a hefty profit. 

This method often relies on the stock decreasing in a predictable manner. This would allow hedge fund people to buy the lower-priced stock in order to make their money back and more. However, this time, reality took a different course.

While GameStop stock had been declining due to COVID-19 and the boom of online sellers, a few Redditors got crafty.

On the subreddit, r/WallStreetBets, a group of first-time and smaller investors noticed hedge fund people shorting. As a result, they decided to change the game. First, many of these investors invested in GameStop (a commonly shorted stock), but rather than join in on the shorting, they kept buying up the stock, which artificially inflated its value. In fact, the price of GameStop stock, because of these investors, shot up by 1000%. 

This was bad news for the hedge fund people as they were banking on the GameStop stock to decrease in value. Rather than making a quick profit, they ended up incurring an unexpected loss. Effectively, the people on r/WallStreetBets short squeezed the hedge fund investors.

However, while this unexpected surge happened, many Wall Street analysts predict that this surge will not last long as the people who bought the inflated GameStop stock will try to sell, leading to the price being reduced. As a result of this thinking, many of those who bought the stock are encouraging investors to “hold the line” and not sell, motivating others to buy GameStop stock.

So far, some high profile people have decided to join the cause. According to Ethan Klein, host of the h3h3 YouTube Channel and podcast, “[I am] buying [GameStop] stock, I don’t care if I lose it all and I will continue to invest in companies being [shorted] by criminal hedge funds until they are all bankrupt.”

Others have lent support. Jon Stewart, former host of the Daily Show, said, “The Redditors aren’t cheating, they’re joining a party Wall Street insiders have been enjoying for years. Don’t shut them down… maybe sue them for copyright infringement instead!!” 

This short squeeze has had some negative effects. The r/WallStreetBets discord server shut down for an hour. According to ARS Technica, “Discord was the first to act, shutting down the WSB server sometime around 6 pm. In a statement provided to the press, the social media service said the WSB Discord server ‘has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin.’”

The popular stock trading app, Robinhood, decided to prevent people from purchasing GameStop stocks. This led to outrage from many and a class-action lawsuit against the company. In fact, Robinhood became so unpopular that Google deleted over 100,000 one-star reviews of the app from its play store, according to The Verge. After the backlash, Robinhood stated that it would allow limited trading of GameStop stock. 

Oddly enough, this Wall Street fiasco has drawn bipartisan support to the Redditors’ cause. Congresswoman Alexandria Ocasio Cortez (D-NY) tweeted, “[Got to] admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.” Senator Ted Cruz (R-TX) commented on the post, “I fully agree.” 

However, other politicians held a different view. Senator Elizabeth Warren (D-MA) stated, “The GameStop roller coaster shows what can happen when the stock market is played like a casino and the [US Securities and Exchange Commission] can’t or won’t stop market manipulation… If we want a healthy stock market, we need a cop on the beat to do their jobs.”

It is uncertain how long this stock market conflict will last, but there may be similar events in the future. While GameStop is a commonly shorted stock, there are other companies, such as Tootsie Roll Industries and Blackberry, that experience this as well. Furthermore, AMC Entertainment Holdings has also received some support from Redditors who hope to recreate the same phenomenon. What this event really shows is that the stock trading world is going to be very different as the years progress.       

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