Gaining half a million new users overnight, the Reddit forum “WallStreetBets” coordinated a strategic campaign to invest in GameStop stocks as a means of increasing the price of its’ stock.
On Jan. 22, the now 7.6 million-member Reddit community, “WallStreetBets”, drove up the price of GameStop and other shortened stocks, which directly impacted hedge fund managers on Wall Street and the stock market.
According to the Associated Press, GameStop’s stock remained at $18 at the beginning of Jan., but has now doubled twice and is currently “up an amazing 928% through the first few weeks of 2021.”
Similar to other retailers, GameStop’s sales have been negatively impacted by the pandemic. However, the company experienced an unprecedented increase in its stocks as retail investors purchased shares.
This move has caused many hedge funds to experience incredible profit losses, especially Melvin Capital. On Jan. 27, a spokesperson for Melvin Capital reported, “Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop).”
Although the hedge fund’s losses have not been disclosed, Melvin Capital received a “$2.75 billion financial lifeline” from the Citadel and Point72 Asset Management hedge funds.
Melvin Capital—and other hedge funds—participate in the short sales of stocks. Essentially, hedge funds borrow a GameStop share and then sell it. Then, if a hedge fund accurately predicts the negative performance of the stock, the stock is bought at a cheaper price and the hedge fund pockets the difference. Through shorting a stock, hedge funds profit off of a stock falling in price.
Melvin Capital bet against GameStop and the increase of the stock has generated incredible losses for the hedge fund, as the firm predicted that the stock would decrease in price. Melvin Capital borrowed more shares of GameStop than they could afford, which led to their closing of shorting GameStop on Jan. 27.
Beyond GameStop, other heavily shorted companies such as AMC and BlackBerry have also experienced an increase in stock prices as retail investors gather.
2019 was a pivotal year for retail investors, as companies such as Charles Schwab Corp. and Fidelity Investments removed commissions on digital stock trading in order to make online investing affordable. This allowed retail investors to have greater access to the stock market and trading.
In an interview with the Wall Street Journal, Jaime Rogozinski discussed the legacy of the subreddit “WallStreetBets” as the original founder. Rogozinski explained the increase in retail investing and engagement in the stock market in the online community.
“A massive group of people have organized where they collectively have a seat at the poker table, which was previously invite-only,” described Rogozinski. “You can’t ignore them anymore.”
Robinhood, a popular trading app from a Silicon Valley startup, promotes commission-free stock trading and investing. On Jan. 28, Robinhood restricted users from trading in GameStop, AMC and other shorted companies. This caused a significant decrease in GameStop’s stock on Thursday.
The stock started Friday morning at $318.64 and closed at $325 on Friday as Robinhood eased restrictions and “allowed limited buys”. A class-action lawsuit against Robinhood for the restrictions on GameStop was launched on Thursday.
In an interview with CNBC, Robinhood CEO Vlad Tenev defended the company’s decision to restrict users from trading in GameStop and other stocks on Thursday.
“Robinhood is a brokerage firm, we have lots of financial requirements. We have SEC net capital requirements and clearing house deposits,” discussed Tenev. “We want to put ourselves in a position to allow our customers to be as unrestricted as possible in accordance with the requirements and the regulations.”
The motivations of retail investors partaking in shortened stocks varies, but CEO of Social Capital Chamath Palihapitiya, argues that retail investors should be allowed to participate in the stock market with equal footing to Wall Street hedge funds in an interview with CNBC.
“Instead of having ‘idea dinners’ or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum,” Palihapitiya defended. “That edge is gone. Now all of a sudden, retail can be on the same footing and they don’t have to be the ‘bag holder’ to Wall Street.”
“WallStreetBets” is aiming for a short squeeze led by its millions of users, which the Associated Press describes as a “feedback loop” that ultimately drives the stock’s price higher. As short sellers bet heavily against a stock, an increase in the stock’s price forces them to buy the stock to make up for the losses.
Retail investors and Wall Street will all have their eyes on GameStop as the stock market opens back on Monday.
