r/wallstreetbets: How A Community on Reddit Cost Hedge Funds Billions

February 5, 2021

 The day is January 22nd, 2021. People across the United States wake up, get ready for the day, and as most Americans do, check to see how the stock market is doing. Nothing has changed very much, except for one stock. It’s a stock for a gaming company known as GameStop, or $GME. The stock value is going up like crazy, and nobody knows why. 

Later that day, there were reports of a relatively small community on Reddit know as r/wallstreetbets, initiated a short squeeze on the stock, where many people organize to buy a stock around the same time, cause the price of a share to rise, and then sell all of their stock to other people who want in on the rise. This then causes the price to go down, and the people who initiated the rise get a relatively large amount of money. Now Wall Street has seen this before. Many traders have tried, failed, succeeded, gotten rich, or lost all of their money by doing it. But this time, it’s different. $GME is up 300% in only two days.

There’s another move on the stock market known as short-selling, where you borrow a stock, sell it, and then buy it back to return it to the lender. Short sellers bet that the stock will ‘fail,’ where the value of the stocks hits zero. But if you bet on the stock to go down, and it actually goes up, you have to buy the difference that the stock has gained. Hedge funds and traders across Wall Street had bet on $GME to fail, and that’s when r/wallstreetbets stepped in. They started a short squeeze, jacking up the price, making a ton of money, and causing hedge funds to have to buy each share for around $350 each. Since the price had gone up so much, the overall cost of what the hedge funds would have to pay back would be well over $1 billion dollars.

Many hedge funds have claimed that what r/wallstreetbets is doing is market manipulation by targeting one stock that’s failing specifically to use hedge funds to lose money and/or a get rich quick scheme. But r/wallstreetbets argues the complete opposite and even accuses hedge funds and other traders in Wall Street of doing the same thing, but even worse. Members of the r/wallstreetbets community say that hedge funds and traders will collectively get together to bet on a stock to fail, or pump up a stock, and end up getting rich, but on a daily basis, so what r/wallstreetbets is doing is 100% fair game, and many A-list celebrities like Mark Cuban came to the defense of the subreddit.

The 300% $GME rise isn’t the only controversy going on. A popular investing app called RobinHood, which most of the reddit investors use, announced that they would no longer be supporting ‘meme stocks’ like $GME, $AMC, and $NOK, almost entirely ending the mission of r/wallstreetbets. Thousands of redditors, politicians, and celebrities spoke out against the alleged market manipulation by the company.

Popular New York Congresswoman Alexandria Ocasio-Cortez took to Twitter about her frustration: “This is Unacceptable. We now know more about @robinhoodapp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.” And unexpectedly, Senator Ted Cruz from Texas replied to Ocasio-Cortez’s tweet, saying, “Fully agree.”

RobinHood later emailed all of their users and gave a statement about why they had blocked users from buying the stocks. It read as follows;

“For RobinHood to operate, we must meet clearinghouse deposit requirements to support customer trades. Deposit requirements are determined in part by how much a stock firm’s customers hold. If a firm’s customers’ holdings are volatile, a broker (in this instance RobinHood) is obligated to meet higher deposit requirements. Last week, in part due to volatility in some popular stocks, RobinHood’s deposit requirements rose tenfold. The combination of the deposit increase and the extraordinary increase in volume on these particular symbols led us to put temporary buying restrictions in place on a small number of those stocks. We had to take steps to limit buying in those volatile stocks to ensure we could comfortably meet our deposit obligations. We didn’t want to stop people from buying stocks and we certainly weren’t trying to help hedge funds.”

Unfortunately for r/wallstreetbets, $GME has taken a nosedive. As of February 2nd, 2021, $GME has gone down to $96 dollars, almost a -130% decrease. Despite the subreddits calls for people to hold the stock, it seems that most owners of $GME stock have started to sell their shares anyways, causing the value to go down, but getting thousands of dollars in return.

Whether r/wallstreetbets continues to push $GME up or sell all their shares all the way back down to where it started, what one community has done to Wall Street is mindblowing. This will be an event that will definitely live forever in the history books.

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    Doug SeivertFeb 9, 2021 at 1:06 PM

    This is a very well written article. I understand how it happened better.