r/wallstreetbets; The little guys trim the hedges
The big story I’ve been following all week, like many of you I’m sure, is this David vs. Goliath fight between somewhat-organized day traders and Wall Street hedge funders. I’m obviously in the day traders’ corner, and it’s a long story why.
Day trading has become really popular in the last couple years due to easier access to the “little people” like us (the average American) through trading apps like Robinhood, E-Trade, and many others. I’m going to talk about Robinhood in a bit, but don’t think for a second that I’m endorsing them.
While working class people are getting into trading and investing at super entry levels, and making and losing bits of cash here and there, it’s barely, if at all, been a blip on the radar of hedge fund managers or the Wall Street elite at all. In January, especially the last week or two, the offices with the leather chairs and fancy headsets are really starting to feel a burning, particularly hedge fund managers like Melvin Capital, and GameStop is looking like it can’t be stopped right now.
There’s a couple terms flying around that can be super confusing. Bankers, stock brokers, and hedge fund managers like it that way because it scares us, and we’re less likely to care if we don’t understand, so we’ll clean some of these up as we go.
So first off, what is actually happening right now? Hedge fund managers are shorting a national video game selling and trading company, GameStop. The people of Reddit, a popular social media site, found out. Thousands of amateur, hobby day traders started buying stock in GameStop to go against the hedge fund managers.
Hedge fund managers shorting GameStop means that they are betting against GameStop stock. They’re betting large sums of money that GameStop’s stocks will drop in value and be next to worthless, if not completely bankrupt. It’s a little more complicated than saying hedge fund managers are “betting against” stocks.
Marketwatch.com explains, “Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. But shorting is much riskier than buying stocks, or what’s known as taking a long position.” When you “go long,” it means you try to get the most possible value, which is insanely high bust or reward.
Marketwatch.com continues, “But if you have a short position, there’s no limit to how much money you can lose if the shares rise. This is where it gets fun.
A Reddit discussion thread called r/wallstreetbets found out about the bet, with millions of dollars hinging on GameStop’s bankruptcy or stock value depletion. They found out about the short position, and said, “Hold our stimulus checks.” They started buying GameStop stocks en masse, and the shares values rose, and the hedge funders started losing their bets to the tune of millions, even billions of dollars while app traders started pocketing pretty fair short-term returns.
These Reddit warriors are doing what’s called “squeezing a short.” Investopedia tells us, “A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.” Now here’s where the Robinhood trading app became a meme and a freshly hated app.
Robinhood has some serious explaining to do, beyond simple PR statements. During some of the biggest hype of the GameStop buying, and to some extent AMC Theatre stock buying, Robinhood Trading made the decision, without warning, to stop letting their users buy more stock for GameStop and AMC. They could only sell what they had. So the Redditors held.
According to the NY Post, Robinhood has since removed the restrictions as of Friday. No doubt due to the initial media firestorm and a lawsuit from a Boston resident.
App traders started jumping ship from Robinhood as much as they could for other trading apps. Free markets are supposed to love competition, and consumers love having options for when they get unfair business practices thrown at them.
r/wallstreetbets and similar threads have made it clear that GameStop and AMC aren’t going to be the only targets of the trading vigilantes. Friday, they started buying stocks in silver and precious metals.
So what happens next? Hedge fund managers and certain Wall Street elites are begging for the Securities and Exchange Commission to step in and regulate things so they can stop losing big. There’s nothing to regulate.
The Reddit army isn’t doing anything illegal; they’re not manipulating the market any more than the shorting hedgers. If the SEC only regulates against the day traders and keeps letting Wall Street do whatever it wants with no repercussions, we’ll know it is certainly a rigged system, and that stocks and investing are only for the rich.
The right thing to do is let things play as they are, and to “let the market regulate itself” like Wall Street always tells us it does.
It’s like the r/wallstreetbets Chairman tweeted last week, “We don’t want socialism. We want a government and market that isn’t corrupt.”