Since the beginning of the year, GameStop stock is up by 1600% – an entirely unprecedented amount. The Reddit group r/Wallstreetbets has driven this meteoric rise. Throughout the pandemic, activity on the page skyrocketed as people sought the stock market as a means of utilising the extra time they had. The community has now increased to over four million members. This has given them the power to manipulate markets to a significant extent. In what seems to be motivated by a spur of both wanting to stick it to the big guy and caring for the ones making a loss, the group decided to uprise against the predatory investment strategy of long shorting and mass invest into GameStop. They did this to ‘short squeeze’ the investment funds (increasing stock value to render short positions useless and force the funds themselves to invest in the stock to mitigate their losses).
Melvin Capital is a long-short fund. This means that they bet on companies to decrease in value over time. Effectively, they make a profit off of other’s misfortune. Throughout this saga, the company has incurred losses in the billions. Due to the spike in GameStop’s share price, Melvin required a $2.75 billion bailout led by Citadel Securities. The main problem for the company resulted from the fact that they were shorting GameStop. Therefore, they were borrowing shares, selling them on the market and using the proceeds to make other investments. Eventually, these shares have to be returned. This is why Melvin required the massive bailout as they were forced to buy shares at a ridiculously inflated price only to give them back to the original owner. These events have been a true David and Goliath battle as the little guy (the day traders) decided to fight against the establishment.
The mainstream media and financial institutions have branded these investors as “dumb money” deriving from a ‘popular, juvenile, foul-mouthed Reddit page’ whilst entirely disregarding the glaring issues that have been exposed throughout this movement. In reality, these traders are fighting against the establishment built on the pillars of ruthless capitalism, designed to favour the big players to the average individual’s detriment. What’s more, the New York Times referred to the movement as being ‘propelled by a mix of greed and boredom’. The fact that the media have the audacity to refer to small players as ‘greedy’ whilst funds simultaneously rake in billions of dollars of profits is astounding.
Legally speaking, nothing illegal per se has occurred. On face value, no evidence of fraud or insider trading being committed by the group has been found (at the time of writing). The law does not prevent multiple traders from agreeing on taking a position in a stock. However, the actions of Citadel Securities and Robinhood (the leading trading platform utilised by day traders) are a prime example of highly immoral collusion and should give rise to legal consequences. Allegedly, Citadel Securities (the owner of Robinhood) reopened their short positions moments before instructing Robinhood to stop trading GameStop stock. Furthermore, the platform began manually selling investor’s GameStop shares ‘to mitigate the unreasonable risk’ to traders. How ironic is it that ‘Robinhood’ would be the platform that has robbed the poor for the benefit of the rich? A class-action lawsuit has already been submitted against Robinhood in response to their actions.
Another serious problem has become evident, namely that the valuation of companies on the stock market is not based on factors relating to the company’s actual value but rather on the volume of shares of a given company being purchased and held. Basic economic theory allows this to be understood. Decreased supply (those who bought already are holding their stock) paired with increased demand (wave of FOMO buyers wanting to get on the trend) is guaranteed to lead to an increase in price. Shouldn’t valuations be based on the actual value of a company?
It is becoming a possibility that GameStop stock will stop being traded for a month to cool off the day traders. Interestingly, this seems to have added fuel to the fire and incentivised the people owning GameStop stock to hold out and maintain the meteoric rise. According to a Bloomberg article ‘If you halt GameStop … people are just going to hang out on Reddit talking it up more until it reopens’. Regardless of the massive fight presented by Wall Street, the day traders have not given up. The endgame is to wait out all the short sellers and sell to them at a profit. However, with the limitations on buying GameStop stock imposed by all major online brokers, this endgame is seemingly becoming increasingly improbable.
Image: Dave Center via Flickr