While most people invest on Wall Street to make money, a Reddit-based group known as Wall Street Bets had a different motive. They saw what wealthy hedge funds were doing to GameStop (GME) stock and decided they wanted to punish them. What came next was a saga more exciting than some video games GameStop sells: over the course of January 2021, GME stock rose from $18 at the beginning of the month to a peak of $483 on January 28th. GameStop did nothing as a company to earn this rally. Rather, it was the decentralized coordination of anonymous Redditors who spurred the buying frenzy.
What Was the Problem
What was Wall Street doing that these users objected to? They were engaged in 3 notable, risky investing practices: shorting, buying on margin, and options trading. When someone shorts a stock, they sell shares at one price with the expectation that the stock price will go down. After waiting for the prices to drop, an investor buys the shares again and profits on the difference. While this can lead to handsome profits if the investor predicted stock trajectory correctly, losses can theoretically be infinite if the price rises instead.
To buy on margin is to use borrowed money for one’s transactions. If investments go the way one predicts, this money will be easy to pay back. If they don’t, the stocks are collateral and losses can be immense. Finally, options give an investor the right to purchase a stock later, usually once it hits a certain price. This can give someone an advantage over those buying the stock outright, but only if the contracted price comes to pass. If it does not, this practice is a total loss for the investor. As one can see from the results, r/WallStreetBets was able to induce losses on several fronts.
What Happened to the Hedge Funds
The hedge fund who suffered the most from GME’s surprise rally is Melvin Capital. This company lost nearly $6.6 billion from their actions surrounding GME stock. That’s over half their value as a hedge fund! While this is certainly bad news for Melvin Capital, the overall market initially believed the bad news wouldn’t reach them. Unfortunately, short sellers had to sell parts of their portfolios to raise cash, leading the S&P 500 to drop by 2.6% on January 27th. It was the worst stock market day in 3 months. People who had nothing to do with GME stock saw their holdings lose value.
It gets worse for Wall Street. Despite their complaints, the SEC (the government body in charge of regulating Wall Street) is only monitoring the situation. Under current law, nothing Wall Street Bets did is illegal. Discussing what stocks to buy in a public online space is no crime. The only party likely to face punishment for their actions is the RobinHood trading app, who stopped users from buying GME stocks for a short period of time. They face a class-action suit for market manipulation. Social media users rarely show this much power.