Oscar Lavitt ’23
A huge uprising never seen before has recently occurred in the stock market. The centre of the conflict? None other than the humble video game and merchandise retailer GameStop.
Names like Reddit and GameStop are not commonly associated with the stock market, which has been traditionally run by hedge fund managers and investors on Wall Street. Despite this, the Reddit community was able to greatly impact the market by buying large quantities of shares in GameStop, effectively overthrowing hedge fund companies that had been short selling the stock.
Hedge fund group Melvin Capital had purchased large quantities of stock in GameStop with the bet that it was likely to go down in value. By doing this, they were able to sell stocks at a higher price to buyers and then buy them back for the eventual lower price, exacting a profit.
This did not go undetected by Reddit community r/wallstreetbets who went on to wreak havoc on Melvin Capital by purchasing large quantities of GameStop stock (GME), driving the value of the stock up by 1900%. They then sold them back to Melvin Capital at a huge gain.
This move lost Melvin Capital enough money that it relied on cash infusions from other prominent hedge funds to avoid bankruptcy. This is a grave warning from the r/wallstreetbets community that as an organized force, they have the power to severely change the stock market.
This short squeeze was predominantly powered by Robinhood, a trading app that does not charge commission on stock trades. This empowered many of the Redditors with limited or no experience in the stock market to purchase into the stock, causing the value to rise.
During this movement, Robinhood tried to limit the purchase of the GME stocks to potentially salvage the situation for themselves and the market. The increased usage of their systems forced them to restrict purchases of the GME stock and others targeted by the Reddit community.
The American Congress recently held a hearing to investigate the wild stock saga, and as the dust clears, the GameStop share value continues to go down, having played its part in the short squeeze. This shows the fragility of the Stock Market, and it raises the question: is it safe to base a country’s economy off such a volatile model?
Photo credit: Shutterstock / TY Lim