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What’s Happening With Reddit, Gamestop, and The Stock Market?

A very interesting situation involving the online forum Reddit and several companies on the stock market including Gamestop is unfolding and changing by the minute. Reactions from both sides of the political aisle condemn the “fat cats” at the top while praising the little guy investing small amounts of money into the stock market. To understand the situation, it is important to back and up and start from the beginning.

One particular Reddit sub-forum called “WallStreetBets” discovered something interesting about Gamestop’s stock. Hedge funds heavily “shorted” the stock, some as much as 140%. Meaning the “short” was more than what was even available. Shorting a stock refers to borrowing stocks from a lender, selling them immediately for market value, then repurchasing the stock later to return it to the original lender. The game is shorting a stock that is seen as failing so it can be purchased for less than what it was sold for. The original lender simply wants the stock back, the borrower keeps the money from the exchange.

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Short selling is inherently risky because sometimes the stock does not fall in price. If the stock rises, then the borrower will need to purchase the stock at a higher price to return the stock to the lender. In the case of Gamestop, shares were available for as low as $2.80 each just a few months ago. The “short squeeze” imposed by Redditors and others ballooned the stock to well over $450 per share. Some borrowers may be able to “weather the storm” but if the borrower gets “called” by the lender, then they can’t wait until the stock goes down in price, they have to purchase the stock and return it to the lender. In this case, Melvin Capital was the proverbial “borrower” and they required a bailout to the tune of $2.8 billion dollars after holding a “short position” on Gamestop of around $55 million.

The left and right side of the aisle are essentially unified on the issue of hedge funds like Melvin Capital not being the victims here. They held a ridiculous short on Gamestop which is (maybe… was?) a dying company. Their intention was to suck the last little bit of money they could from the corpse of Gamestop. The problem is that nothing is guaranteed, especially holding short positions. They got too greedy and “caught out there” by regular people observing the situation and operating in an intelligent fashion.

The White House released a statement saying that they are “monitoring the situation” but what is there to monitor? There are no illegalities here, at least not on the surface. All WallStreetBets did was behave as a public square for people to talk about stocks. That’s it. There was nothing anyone could see on the Discord server or Reddit forum that would warrant an inquiry from the SEC for some violation. And if WallStreetBets did something wrong, then people like Jim Cramer of CNBC and Charles Payne of Fox Business must also be wrong. But obviously, they are not. Nothing is wrong with simply talking about stocks.

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Big Tech has an issue here because some of them are funded by the same funds that are involved in the “short squeeze.” The wildly-popular stock purchasing / trading app called “Robinhood” halted new purchases of Gamestop, AMC, and a few more stocks touted on “WSB” and social media in general. Robinhood is heavily funded by a group called Citadel and Citadel contributed to the $2.8 billion dollar bailout Melvin Capital just received. It would make sense for Citadel to have influence over Robinhood to prevent them from contributing to the rise in price of the stock to protect the bailout they just gave to a company being harmed by the stock. But is that legal? That is going to be a battle fought for a long time. Because when billions of dollars are involved, all gloves are off.

SOURCES:

WALLSTREETBETS “HACKERS” DEFACING THE MARKET! – YouTube

Massive Gamestop Short Squeeze Highlights the Fragility of Today’s Financial System – Featured Bitcoin News

Discord bans the r/WallStreetBets server – The Verge

GameStop short-seller down 30% this year gets $2.8 billion bailout from the firms of billionaire investors Steve Cohen and Ken Griffin | Markets Insider

Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management – WSJ

Reddit sent AMC and GameStop stock to the moon. Why, and what happens now – CNET

GameStop (GME US) Rally to Push Some Hedge Funds to Bankruptcy: Gartman – Bloomberg

Robinhood, TD Ameritrade restrict trading of GameStop, AMC stock – CNET

The White House is ‘monitoring the situation’ as Reddit pushes GameStop stock even higher | PC Gamer

Robinhood halts trading of GameStop and other heavily shorted stocks as hedge funds suffer

How an Investor Makes Money Short Selling Stocks

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1 COMMENT

  1. Sometimes you eat the bear…. and sometimes… well sometimes the bear eats you. The fact that buying or selling millions of shares, which these big funds can afford to do, can vary the price of stock so much is part of the reason I don’t like the stock market. It’s great for investing in a company but the traders can really mess with the numbers. Thanks for the update ABL

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