Amateur traders use social media to unite and gang up on billion-dollar Wall Street hedge funds to squeeze them out of positions and punish them for their greed.

Sounds a bit like low-budget, college-project movie right? Well, that is exactly what has been happening over the last two weeks and as a result, “Gamestop” will now forever be immortalised as shorthand for this online financial rebellion, perhaps a far greater legacy than the mere electronics and gaming store it was known as up until recently.

Let’s start at the beginning.

Essentially what happened is, there is a community forum on the social media platform Reddit called “WallStreetBets” where members, predominantly amateur traders, share their trades and analysis of the market. The group was no different to any other retail trading community up until this year. A portion of the groups membership to began discussing the potential of using their collective power to take a stand against merciless short-sellers who were targeting companies experiencing difficulty as a result of the pandemic. One of the stocks which came up was GameStop, the humble gaming vendor suffered drastically as a result of the pandemic and its misfortune soon drew the attention of infamous short selling hedge funds such as Melvin Capital among others.

With GameStop on the brink of bankruptcy these amateur traders decided that if enough of them could buy GameStop’s stock, they could drive the price back up. Now, this is where it gets interesting. As this little movement started to get traction and these guys realised this could actually work, more and more of the group’s membership flooded the market. Now, if ten amateur traders take a position, its not going to do much, but 10,000 or 100,000, what happens then? Well, we don’t know exactly how many of these guys bought stock but GameStop’s share price rallied 2000% in around two weeks trading from around the $20 at the start of the year to highs of almost $500. As a result, hedge funds such as Melvin Capital actually capitulated and were stopped out of their positions, some losing massive amounts of money. For example, Melvin Capital had to raise $2.75 billion to cover its losses and stay afloat while Citron research took a 100% loss.

Financial Community Backlash

The success with GameStop proved WSB member’s theory right and the group began flooding into other struggling stocks such as AMC, American Airlines and BlackBerry among others. As news of the movement spread, there has obviously been a huge reaction among the financial community who called foul play, claiming that this akin to insider trading and that sharing investment advice on social media should be prohibited, once again calling into consideration the need for social media content to be regulated.

Trading Restrictions

As a result of the outrage, trading platforms such as RobinHood (the free trading app that most WSB members used) Trading 212, and Interactive Brokers among others have placed restrictions on certain stocks, temporarily banning purchases (though some have now been re-installed in limited quantities). The restrictions saw GameStop’s share price plunge around 80% this week sparking equal fury among amateur traders who claim they did nothing wrong. Indeed, there is now a congressional hearing underway to establish whether these platforms acted illegally in banning trading. With some platforms opening up again, GameStop is trading around the 341 mark pre-market today. A wild ride indeed.

Wrong or Right?

One of the big questions floating around is whether the Reddit traders acted illegally or at least “dangerously”? Well, on the one hand, the rally in GameStop and other such stocks had nothing to do with underlying fundamentals, the health of the business or its future prospects and was merely the function of organised demand. On the other, that is what the free market trading is about. Hedge Funds can’t ask for the ability to sell a stock into oblivion without the risk of it also being bid up into the stratosphere. If anything, the event simply highlights the bizarre way financial markets work and the fact that you really don’t have to be an economics genius to make a buck on Wall Street.

Divided Opinions

The fall-out from this has been incredibly far reaching and has shone a light on the double standards and corruption which have plagued the upper echelons of the financial community. Wall Street has a long history of using its unfair informational advantage to profit from regular people and businesses. Stories of insider trading and front running of orders continue to pop up year after year despite endless “reforms” and new regulations. The fact that hedge funds were allowed to continue selling these stocks while retail traders were banned from buying them has been flagged by many as the ultimate sign that high level finance is rigged, claiming that hedge funds exerted influence over these apps and platforms to get them to put an end to the buying. Some traders have already filed lawsuits with many in the SWB group calling for a mass action lawsuit. The movement has also received support from across the political spectrum and maybe the whole thing was worth it just to see Ted Cruz siding with Alexandria Ocasio-Cortez on Twitter.

So, what now?

This is certainly a defining moment in the history of financial markets with both sides. Given the severity of the losses suffered by these hedge funds it is unlikely that they will leave themselves open to such attacks in future and it would appear likely that fresh regulations will be brought in in some capacity. However, individual traders have now found a chink in the armour of Wall Street and with support from across the political spectrum claiming they did nothing wrong, this is certainly a story we will be keeping an eye on.

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