Social Media Wages War on Wall Street

For the past week chaos has reigned supreme across financial markets—GameStop ($GME), a struggling American brick-and-mortar retailer was at the centre of it all. Reddit users rallied to drive up the stock’s price—and that they did. Last year, $GME traded at a low of $2.57 a share. Last week, it traded at a high of $482.85.

That’s a pretty wild jump in price.

GameStop has triggered an all-out war between short-selling hedge funds run by billionaires and retail investors aiming to “squeeze” them while making themselves rich in the process.

Put on your hazmat suits—this war is going nuclear.

The Big Short (Squeeze)

If you’re not a stock market expert, there is a good chance that last week you were googling ‘short-selling’ analogies, reading articles on the topic, and possibly re-watching “The Big Short” in hopes of understanding what exactly was going on with the stock market.

Normally when we think of the stock market, we automatically think ‘buy low, sell high’, but shorting is the opposite—it’s ‘sell high, buy low’. Basically, investors bet that a stock’s price will drop, so they borrow the stock (from a lender), immediately sell the stock, and eventually buy the stock back. If the price dropped, they make a profit. If the price went up, the investor will be left with a loss. When shorting works, it can be very lucrative—if it doesn’t, there is no limit to how much someone can lose. It’s risky.

For the past five years, $GME has been the most shorted stock on Wall Street. Whenever billionaire hedge funds got thirsty for a short, they could always drain GameStop, but a year ago, they got too greedy. Short interest on GameStop hit 139%—which means that there were more short bets on $GME than there were shares available.

One social media community took notice. The subreddit r/WallStreetBets realized that if they, en masse, bought $GME shares at higher prices, this would force short-selling hedge funds to follow suit. 2 million Redditors smelled blood in the water and were more than happy to mess with the billionaires that were banking on GameStop’s demise.

The Battle Begins

The first casualties were Citron Research and Melvin Capital, two hedge funds notorious for short selling. Citron announced 100% losses on $GME, and that they were leaving their position. As for Melvin, they teetered on bankruptcy and only survived due to a $2.7 billion loan from fellow hedge funds Point72 and Citadel.

Almost immediately, financial journalists on Bloomberg and CNBC denounced the “reckless” rise of $GME shares. Billionaires accused Reddit of market manipulation—the financial industry (which usually decries regulation) called for more regulation.

As the share price for $GME inched higher, the SEC announced they were “carefully watching” social media for market manipulation—implying that retail investors would be punished for the Short Squeeze.

By this time, the war spread to other parts of social media. On Twitter, billionaires like Mark Cuban and the Winklevoss Twins echoed support for r/WallStreetBets. Elon Musk simply tweeted “Gamestonk!!” with a link to the subreddit—this was enough to send $GME over $300 a share.

Elon Musk says,

On YouTube, amateur and professional financial analysts alike were streaming new developments. Stock market memes invaded Facebook. Even teenagers on TikTok were given an education on short-selling.

Then things got even crazier.

The War Has Gone Nuclear

Short-sellers lost $91 billion dollars on their GameStop positions. Of course, they weren’t going to take it lying down. Besides, they had a tool that Redditors and other social media investors didn’t have—the ability to influence trading platforms.

Robinhood, the app of choice for Reddit r/WallStreetBets investors, is partially owned by hedge fund Citadel. As we mentioned previously, Citadel issued a loan to Melvin Capital—one of the hedge funds affected by the short squeeze.

On Thursday, January 28th, Robinhood announced that users would be unable to buy $GME stock nor any other stock favoured by r/WallStreetBets. On the other hand, they could sell those stocks. Numerous Robinhood users said that the app sold their shares without their consent—something their Terms of Service states they’re allowed to do.

Robinhood TOS

By no means was Robinhood the only trading platform to refuse the purchase of $GME shares. TD Ameritrade, Charles Schwab, and Webull also halted trading but since Robinhood was both the most popular platform and the one with a significant conflict of interest, they received the most attention.

Hence why Robinhood has now been hit with a class-action lawsuit that says:

“Robinhood purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market.”

Hedge funds have demonstrated that if you make trades that go against their interests, they will instantly change the rules of the game.

Politicians have taken note. On Twitter, Democrat Congresswoman Alexandria Ocasio-Cortez stated, “This is unacceptable. We now need to know more about [Robinhood’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 [Committee], I’d support a hearing if necessary.”

“I agree,” tweeted back Republican Senator Ted Cruz. Alexandria Ocasio-Cortez and Ted Cruz agreeing on something? Now that’s crazy.

How Does This All End?

It will be interesting to see how regulators and politicians choose to get involved in the long run. Will changes be made to a system that is set up to protect hedge fund billionaires? Will regulators go after social media platforms in hopes of preventing future “market manipulations” from going viral?

There’s no definitive answer as to how this saga will end but there is also no doubt that this is a pivotal moment in the world of investment. The game hasn’t changed but some of the players are different. This unexpected power move by a group of “unsophisticated” investors will leave a lot of ‘fat cats’ feeling uneasy and leave the ‘little guys’ looking for more ways to push back at a system that has wholly existed to serve the wealthy.

“Whatever happens, the episode marks the widespread discovery of a new frontier where the internet and the stock market intersect.” -Alex Kirshner, Slate.