Stock Market Mayhem Follows Reddit Users’ Mass-Investment

A+community+of+Reddit+users+%22mass-invested%22+in+Gamestop+and+AMC+stocks+in+order+to+raise+the+prices.+

Le'Mario Somerville

A community of Reddit users “mass-invested” in Gamestop and AMC stocks in order to raise the prices.

At the beginning of January, shares of GameStop stock (GME) were trading for around $17. Since then the stock has peaked at nearly $500 a share, and it’s not alone. AMC, Blackberry and Nokia have both seen massive spikes in share prices. Hedge funds are losing billions of dollars, financial apps like Robinhood froze the trading of specific stocks involved and all of this is driven by a group of retail investors on Reddit? So what is causing all of this? It’s been all over the news but, with so much confusion and investment terminology, it has been hard to track. So let’s start at the beginning.

First we need to understand the practice of “short selling.” Essentially, an investor borrows a stock for its current price from a broker; let’s say for $20. The investor then immediately sells the stock into the market and hopes for the price to go down. If the price goes down, let’s say to $12 now, the investor buys the stock back and sells it back to the broker, taking an $8 profit. But if the price of the stock goes up instead of down and jumps to $25, the investor is looking at a $5 loss, something known as a short squeeze.

This phenomenon started when the subreddit, r/Wallstreetbets caught wind that major hedge funds were taking short positions on stocks such as GME and AMC. They devised a plan to attempt to “mass-invest” in these stocks to drive up the price and cause hedge funds to take a huge hit while also making themselves a healthy profit. In an attempt to minimize their losses, hedge funds such as Melvin Capital, Point 72 Asset Management and Citadel bought back their shares which only fed the fire and drove the prices of the stock higher. Calls for “market manipulation” started to spread around and the hedge funds made it clear that they were looking for regulatory intervention. 

The volume at which these stocks were being traded forced financial service firms, also known as brokerages, like Etrade, TD Ameritrade and Robinhood, to restrict or even freeze trading altogether. This caused major controversy over social media as conspiracies spread claiming these companies were attempting to minimize the losses for hedge funds, while restricting potential profit for investors. 

According to the New York Times, “Robinhood, a firm backed by venture capital, said it had decided to limit the buying of securities like GameStop because of the regulations that govern it, including capital obligations mandated by the S.E.C., rather than pressure from Wall Street.” 

What this means is Robinhood simply did not have enough money available in their accounts to cover heightened margin requirements from the central clearing facility, which is why they had to slow the flood of investing so they could have time to recover. 

According to various internet users, halting the trading of GME seemed shady on surface level.

Congresswoman Alexandria Ocasio-Cortez tweeted on Thursday, “This is unacceptable, We now need to know more about @Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” 

Barstool Sports president and avid retail investor Dave Portnoy claimed Point 72 Asset management founder, “Steve Cohen and his Wall street cronies deserve jail time.”

“Dems and Republicans haven’t agreed on 1 issue till this. That’s how blatant, illegal, unfathomable today’s events are. It also shows how untouchable @RobinhoodApp @StevenACohen2C Citadel Point72 all think they are. Fines aren’t enough. Prison or bust,” tweeted Portnoy.

According to business instructor Brett Froendt however, there will most likely be no investigation into Robinhood due to the terms and conditions of the app allowing them to prohibit or restrict the trading of securities at any time. 

“It doesn’t necessarily make it right, because they did stifle free trade. They limited people’s opportunity to buy and sell in the markets and that should not be tolerated,” Froendt said..

Regardless of the outcome of any possible investigations, this event has been historic to say the least.   

“We’ve never seen anything like this in the market before, which is why it’s such a big event,” Froendt said. “The retail investors didn’t know if this was going to work or not. They got lucky, it became the perfect storm and they were able to capitalize on it.”

According to Froendt, he believes hedge funds will begin to reconsider the practice of taking short positions on stocks because of the newly exposed volatility. As for the average investor, it seems there will be a wave of investors getting involved in the market with 3.7 million people installing the Robinhood app in January alone.