Last week was about challenging economic power. A war between amateur private investors and giant hedge funds emerged in the world of stock markets as a result of an online Reddit forum called r/wallstreetbets. The story had many twists and turns, and attracted the attention of the public, politicians, regulators, the media, and Wall Street titans all at once, but what had happened?
GameStop – an American video games retailer on the verge of crashing, saw an increase in its shares value from $20 on January 12th, to almost $400 on January 28th, transforming a company that was valued at less than $2bn at the start of the year into a $24bn fortune within days. This meteoric surge in value was seemingly created when r/wallstreetbets noticed that hedge funds had taken a short-selling position in GameStop. The online forum then decided to trap the Wall Street big boys at their own game and launched a co-ordinated buying spree which caused hedge fund titans to lose billions to Reddit traders.
Hedge funds business plan is essential to bet that a certain company will lose a lot of value and the way it does that is through something called shorting or short-selling. This is essentially when traders borrow shares in a company, sell them, and then buy them back at a lower price. They then return them to the owner and pocket the profit. Late last year, a few hedge fund managers have betted against GameStop, hoping to drop its value in shares and then capitalise on the losses. But huge numbers of small investors from the wallstreetbets Reddit forum started buying the stock, raising its share price massively, and these hedge funds managers who had banked on its dropping in value had to buy their shares back.
Surprisingly, this has caused a lot of distress in the untouchable Wall Street world, and as a result, US regulators interfered and decided to review the activity. The Security and Exchange Commission (SEC) warned market participants to be careful not to manipulate the share trading: “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence. We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.” This caused many companies to restrict stock sales, and the trading app Robinhood stopped users from trading GameStop stocks entirely, which infuriated customers and raised concerns about whom does the free market belong to.
In the UK, the Financial Conduct Authority (FCA) said they are monitoring the situation and warned the British public to be cautious. “We’re warning the UK investors in certain US-listed shares which are being discussed online to use extreme caution. Volatile markets are unpredictable and mean you can quickly lose money. Losses are unlikely to be covered by the Financial Services Compensation Scheme #wallstreetbets.”
Amateur traders were not the only ones outraged by the move to stop trades. Alexandria Ocasio-Cortez, a Democratic congresswoman from New York called the restrictions “unacceptable”. Elon Musk tweeted: “u can’t sell houses u don’t own u can’t sell cars u don’t own but u *can* sell stock u don’t own!? this is bs – shorting is a scam legal only for vestigial reasons.”
Doug Henwood, the host of Behind the News wrote: “The online pranksters behind the great GameStop bubble of 2021 are probably going to lose a lot of money. But they’ve done the world a service by reminding us of the utter uselessness of the stock market, an institution that serves no purpose besides making a small number of undeserving people rich.” According to him, IPOs – initial public offerings in the last 20 years have added to $657bn (£479bn), while the companies in S&P 500 stock index have spent $8.3tn (£6tn) buying their stock to increase its price. Many fear that the GameStop affair revealed the fragility of the financial market.