The stock market in recent days has been dominated by the rise of the GME or GameStop stock which traded in 2020 at merely 5 dollars and was considered worthless. The reason with this bizarre phenomenon is due to reddit (a social media site), billion-dollar hedge funds, and an army of individual investors wanting to punish Wallstreet in a memorable way. The story of the Reddit stock rebellion is important for many reasons, but first you must understand the background for how this even happened.
The story of the Reddit costing hedge funds billions starts in December 2020. A user on reddit noticed that the GME stock is one of the most shorted stocks on the market. A shorted stock is where one person buys the stock from a shareholder and sells that stock but promises to buy the stock back at whatever the price is later. That means that if the stock goes down in price the difference between the old price and the new price is your profit; However, if the stock price rises you must pay extra to buy back the stock’s new price. This means that shorting a stock could technically have infinite risk as the stock could go up by any number within a given time frame.
Users in an infamous subreddit called “/r/WallStreetBets” looked at the GME stock and started buying up all the shares to increase the value of the stock. The ploy worked and the value of GME shot up by over 200% within an extremely short time frame making stockholders of GameStop instant millionaires in some cases. The rise in the price of GME meant that all the hedge funds that shorted GME now owed thousands of individual investors billions of dollars which bankrupted some people instantly. Some Wallstreet investors ended up getting bailouts for the money lost and put the money right back into shorting GME; However, the issue is that many individual investors were heralded by Reddit to not sell their shares until the stock reached an insanely high price.
The chain effect caused by hedge funds shorting more GME stock and individual investors buying up more at the same time led to GME being worth over 300 dollars a share. This high price means that short sellers are effectively being held ransom by individual investors who own GME stock and institutional investors are begging for people to sell. This situation immediately caught attention of the traditional media, government, and anyone interested in the stock market.
Traditional media sources and the government took an adversarial position to the rise in individual investor power immediately. Cable news labeled the infamous subreddit as market manipulators and bullies. The government started feeling the need to “shepherd the situation for the safety of the investors”. Rich hedge fund brokers positioned themselves as victims publicly to draw sympathy from whoever would listen. Traditional sources were not the only people to challenge the new investor army though.
Stock trading platforms like Robinhood and TD Ameritrade recently halted buying shares of stocks favorited by the subreddit “/r/WallStreetBets”. This meant freezing the assets of millions of individual investors that had hopped on the stock market hype train. Some banks also banned advisors from recommending the GME or AMC stocks to clients. The message was clear that traditional powers in the money market do not like being played at their own game. The trading platforms immediately received backlash from thousands of their users as the effects of the temporary measures started to get noticed.
The biggest takeaway from this situation is the sheer hypocrisy of traditional financial institutions. They have played the market for years and lost average people millions but cried wolf when they got played. No-one else in America would be able to receive billion dollars checks for making terrible decisions other than Wallstreet. The worst aspect of this fiasco is the coordinated demonizing of individual investors for using the free market to their advantage which is extremely ironic after the financial recession of 2008. The sheet amount of fixing that occurred after Wallstreet lost their money will be studied for decades.
The reason this situation is important is that the balance of power just got shifted to the far-left field. Individual investors have banded together to collectively directly punish greedy hedge funds that have toppled many companies. Larger hedge funds will now have to pay attention to individual investors trends if they hope to not get played again. Trading platforms will have to play a careful game in the future of pleasing investors, but also not making the SEC angry. The playing field for the stock market has been permanently altered thanks to a group of financially savvy redditors(aka users of reddit); However, the field is still in flux at the moment of writing this article.
This kerfuffle will most likely lead to an SEC decision that will change things forever. Trading platforms could be held accountable for the chaos and get regulated in a way that ruins them. Alternatively, the SEC could end up trying to screw over individual investors (or retail investors as they say) by siding with Wallstreet cronies. The resulting rule changes will certainly affect how all digital trading platforms operate one way or another. The SEC has the power to tip the balance back in favor of Wallstreet or to give individual investors even more control of the pie.
In the future big business might start playing ball based on what the collective of retail investors desires because they just will never want this situation to happen again.