By Eric McDaniel

Over the past few years, video game consumers have taken advantage of a variety of online retailers and purchased games digitally. Most GameStop stores, a business that once thrived as a place to buy and sell video games, are located in shopping malls, and malls across America are dying due to the rise of online shopping. As a result, GameStop has been left with more supply and less demand, ultimately leading to a struggling business. In the first nine months of 2020, GameStop lost over 280 million dollars. In September, GameStop announced their earnings and said they were closing nearly 500 stores across the world.

Wall Street Bets logo. Image courtesy of reddit.com.

Hedge funds, sometimes referred to as Wall Street’s villains, noticed the struggling business. They believed that GameStop stock (GME) was overvalued and began to short the stock. Shorting a stock is betting on a stock to fail. While shorting a stock, an investor borrows a stock from another party, then sells that stock at the current market price, hoping that the stock price will decrease in value. Once the stock loses its value, the investor will buy the stock, at a cheaper price, and return it to the original investor, while keeping the difference in profit. 

Some see shorting a stock as unethical, because it is betting against the economy. Short selling is a risky option for traders because of the typical upward trend of the stock market. But hedge funds and wealthy Wall Street investors practice this strategy as they can manipulate the market.   

On the internet community and social media site Reddit, Wall Street Bets (WSB) is a subreddit, or online community, that has millions of subscribers, many of whom bond over stock memes, insane bets, and terrible trades. At the start of 2021, they started an effort to pump the GameStop stock. Wall Street Bets and amateur stock traders succeeded, as the GameStop stock exponentially increased over the course of January.

Image credit: Eric McDaniel.

Image credit: Eric McDaniel.

Before January 12, GME was consistently under $20. On January 20, the stock price doubled to around $40, and five days later the price doubled again to around $80. Then the following day, January 26, the price shot up to $148, and on January 27, the stock peaked at $347. A short squeeze was created, which is what happens when a stock price jumps, forcing the traders who were short-selling the stock to buy, because they have to return the stock to whom they borrowed it from. As the hedge funds scramble to buy the stock, it only contributes to the increase in the stock’s price.

Melvin Capital Management, a New York City-based investment firm, was forced to take their losses in Gamestop. Melvin Capital lost 53% of their investments in January and ultimately lost billions. On the other hand, Ryan Cohen, co-founder of the company Chewy, became a billionaire. Cohen gained over $2 billion as a result from selling his shares of GME. Amateur traders who won on GME splurged, paying for college, medical school, cars, and some of the more wealthy traders donated some of their profits to charities.

GME was just the start of this financial revolution between Average Joes and Wall Street. Other stocks that were being shorted were brought to attention by those on Reddit as well. In addition to Gamestop, about 13 companies’ stock prices were driven up, including American Airlines, Nokia, Blackberry, Express, and more.

Robinhood, one of the best investment apps going into 2021, restricted the trade of these Reddit-pumped stocks. Robinhood is targeted to the amateur investor/trader in the stock market. When a trader on Robinhood places an order to buy a stock, Robinhood then takes that order to a market maker, who fills out that order. The market makers pay Robinhood, and the market maker has an advantage as they see what orders come in before they are filled. Typically, the price a trader pays on Robinhood is slightly higher than the advertised market price when one would have filled out their order. The restriction of trades frustrated many across the world.

Robinhood received backlash when they banned the trade of these Reddit-fueled stocks, as they are advertised as the app for the amateur trader. Robinhood released a statement giving their reason, claiming that “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.” The large amount of deposits could cause an issue with their business because Robinhood doesn’t have direct access to the stock market; they just serve as a middleman. This has contributed to the David-and-Goliath relationship between amateur investors and Wall Street.

Featured image credit: Eric McDaniel.