Stock Exchange daytraders, spurred on by the online community, Reddit forum r/WallStreetBets, have engaged in a power struggle with Hedge funds, which exposed Wall Street to market volatility. 

Background:

Game Stop is a video game retailer with a hard time keeping in business; most video games have moved online due to the pandemic. Many companies in this position find themselves in similar situations as Game Stop — they may be subject to short selling. Short selling is where professional investors borrow shares of stocks to sell and buy back later, returning them. By doing so, it lets them keep the profit if the stock value goes down. 

However, GameStop has now become a source of a short squeeze.

What is a Short Squeeze?

Short-sellers borrow and sell a stock when it’s high and will bet that the company will continue to fall. However, if the company’s stock price does not fall, short-sellers are forced to cover their position or buy more stocks to minimize their losses. More excitement will push up the stock’s value; therefore, lowering the short seller’s profit. In essence, short sellers (frequently significant hedge funds) bid against a company’s success. 

In GameStop’s case, the massive online forums illuminated interest in buying stocks, pushing up the price and fueling more interest worldwide. The Reddit forum r/WallStreetBets has sent the stock price up by 14300%, though there have been many fluctuations. This community has also targeted AMC(AMC) and BlackBerry(BB), utilizing the same tactics it did for GameStop. This, in turn, left short sellers with no more shares to buy to cover their positions, creating a short squeeze and leaving them with millions of dollars in stocks purchased at a higher price than the aftermarket price.

Karrissa Ho ‘21, Mayfield’s Females in Finance Club leader, explains what this means to retail traders, that is, regular people who buy stocks on apps like Robinhood.

Quote from Karissa Ho ‘21: 

“I think it’s a really peculiar, precarious situation. On one hand, you have this army of Redditors prepared to continue striking against the big guys with unknown influence fueled by hype and speculation, but on the other hand, those massive hedge funds could retaliate by flooding the market and making things even more volatile,” said Ho.

Melvin Capital closed its short position in GameStop on Tuesday after taking a considerable loss. 

How is Wall Street Responding to This?

Robinhood Markets and Interactive Brokers joined the growing group of stock firms restricting the tradings of stock. GameStop’s (GME) stock price has skyrocketed with an increase of roughly 8,000% over six months. The stock has become a central place in a financial power struggle between Melvin Capital, a prominent hedge fund, and a group of stock investors.  

Robinhood had come under scrutiny for appearing to severely restrict some stocks’ trades while the market was fluctuating on Tuesday. Politicians on both sides in the U.S. have called for an investigation into the app maker. White House Press Secretary Jen Psaki told reporters that the Biden Administration’s economic team monitors this situation. NASDAQ responded, saying that it would halt trading stocks when detecting unusual activity on social media because it believes its role to be ensuring that the market acts legitimately. 

“I trade on Robinhood (under my dad’s account), but I’m certainly considering moving to a different platform that hasn’t been shown to limit buys,” said Ho. Ho feels trading on Robinhood feels oversimplified but appreciates making trading accessible. She said she wonders if the Gamestop issue is what can happen for “overenthusiastic young people.” 

“I don’t know everything,” said Ho, “but I’m curious to see if this creates a further division between those who seem to be in control and those who want to be in control, and to see what this means for trading in the future.”