GameStock Pop Stop?

Jan 31, 2021

Wall Street or the Wild West?

Episode 1 in the 2021 saga has received a “Certified Fresh” on Rotten Tomatoes. You might as well call us the new Hollywood Reporter...

So where do we begin?

It all started when Andrew Left, a Citron Research Analyst, and other short-selling activists publicly shorted stocks like GameStop, AMC, and BlackBerry.

What’s short-selling? Investopedia explains that “an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price.”

The Redditors on r/WallStreetBets were riled up by what Andrew Left had to say about their beloved GameStop. The over 2 million people on the thread r/WallStreetBets saw an opportunity to antagonize the hedge fund managers who bet that GameStop’s share price would fall, in what is known as 'a short'.

The Redditors realized that if they all bought the GameStop shares, they could drive the prices of the stock up. This would cause hedge fund managers’ bets to be incorrect, costing these managers millions of dollars and lining the pockets of the everyday man.

Then, those who shorted the stock had to buy shares to minimize losses, forcing the price up even more. This phenomenon is often called a “short squeeze.” So, here we are: an obsolete brick-and-mortar video game store is worth more than Microsoft, a legitimate and cutting edge software company.

On Thursday, the stock reached a high of $469 per share and went down to $325 Friday night. Robinhood and other trading apps collectively put their foot down, restricting trading on GameStop and other “meme stocks,” as they have been dubbed. As a result, users took to Twitter to express their anger and call out Robinhood for abandoning its mission: “democratize finance for all.”

Even Democrat Congresswoman AOC and her Republican rival Senator Ted Cruz agreed, both condemning Robinhood’s actions! Who would have thought that Reddit users could finally unite the government (lol)?

Why would Robinhood do such a thing?

Robinhood’s CEO, Vlad Tenev, claimed it was to “protect [his] firm and protect [their] customers.” The email sent to all Robinhood users cited “recent volatility” as the reason for restricting trades and explained that it is their job to “help customers stay informed.” But the question arises, is it really Robinhood’s job to police their customers who know the risks of investing? And is it really their right?

Robinhood changed the rules mid-game to save their rear ends and rescue the big guys on Wall Street. With the slogan “democratizing finance for all” it doesn’t make much sense to inhibit the small traders.

The users on r/WallStreetBets were furious and filed a class action lawsuit against Robinhood.

What does all of this mean?

For starters, short sellers lost a combined $20 billion so far. Citron Research and Andrew Left announced that they will no longer publish their short-sell reports.

Pretty much everyone thinks the “meme stocks” are going to fall. But when? Nobody knows.

Other stocks like AMC Entertainment and BlackBerry have also been seen floating around r/WallStreetBets trying to create artificial demand to drive up price.

Many are calling for arrests to be made in regards to Robinhood restricting trades. Dave Portnoy, Founder of Barstool Sports, has been vocal about his disgust with Robinhood and calls for prison sentences for its leaders. He argues that the hedge funds are controlling the game and they shouldn't be allowed to change the rules mid-game.

The rise of these “meme stocks” raises a lot of questions. Are stock prices now based on a company’s clout? Or will prices be an accurate representation of the viability and sustainability of a business? Is the Efficient Market Hypothesis total BS? When the Redditors inevitably strike back, what stocks are next?

These questions remain unanswered, and at this moment, all we know is that the internet and virality have fundamentally changed the dynamics of the stock market. Chamath Palihapitiya, a famous venture capitalist, explained the situation perfectly in his tweet: “r/wallstreetbets is now the largest hedge fund in the world. Except it’s completely decentralized and entirely democratic.” Down with the man!

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