(This is not financial advice and I am not an expert)
A subreddit on Reddit named “Wallstreetbets” has sent the stock market into a frenzy starting on January 13. On January 22 GameStop (GME) shot up 50% to almost $65. The reason for this was because a redditor on the subreddit named “DeepF***ingValue” wrote a post on how GameStop stock was shorted about 140% and the low amount of stock in the market.
A short is when someone borrows a stock, sells it immediately, and hopes to buy it back at a lower price. You have to pay interest on the stock which can vary to volatility and stock price. This level of short selling can force a company into bankruptcy.
On the first day when the stock price doubled, many of the short sellers doubled down saying that the stock is overvalued and holding their positions. This was only the beginning. After that day, the stock soared to a high of $483 on January 27 — at the time only about 20% of the shorts had closed their position.
Citron Research run by Andrew Left is noticeable because he said that he shorted at $40 and said the hysteria around the stock would die down. He was a villain in the subreddit and his statement started to rally the stock even more. After the skyrocket, Citron had closed their position in fear of it continuing. Left released a video about this on Citron Research’s youtube channel. Left was no longer the villain in the subreddit. The new villain was Melvin Capital which holds a majority of shorts on GameStop.
Melvin Capital refused to take their losses and received a bailout of $2.75 billion to buy a non majority share in the hedge fund from Ken Griffin (Citadel) and Steve Cohen (Point 72).
While all this is happening “the Suits” (Hedge Fund Managers) had been going onto CNBC and Fox Business to complain about what they call “market multiplication.”
On January 27, Melvin Capital had gone to the media to say that they had closed their position. From all data provided, this is unequivocally untrue, and the people of Wallstreetbets noticed. The total shorts had remained the same sitting at around 120% still while the stock price was at the high $483. They were paying billions on the interest of the shorts. At this point, short sellers in total had lost about $12 billion on GameStop interest alone. It felt like the little guy finally got one over on “the Suits.”
Then the rules of the game changed. On January 28, the brokerage app Robinhood stopped allowing anybody on the platform from buying GME, AMC, NAKED, and NOK. While we haven’t talked about any of these other stocks, they were in the same boat as GameStop, just not as drastic.
Robinhood was smashed on social media for this decision. Founder of Barstool Sports Dave Portnoy — who was personally invested in some of these stocks and had tweeted about the stock — was a front runner on smashing Robinhood.
After this tweet, he had called what he calls an emergency press confession on his twitter. He also went after Steve Cohen for his insider trading violations in 2013. After making Cohen delete his twitter, people such as Portnoy started to make connections between Citadel who was a part of the bailout of Melvin Capital, and the stopping of buying on Robinhood.
Robinhood — a free trading platform — makes its money by selling your trade data to hedge funds, the main one being Citadel. So, the company that is Robinhood’s main client is losing billions of dollars on a handful of stocks. It seemed suspicious to a lot of people. Also very ironic with the name of the company.
Robinhood CEO Vladimir Tenev went on CNBC and CNN to defend the decision and also explained that it was a “capital” issue. The damage had already been done for people paying attention to the situation. Robinhood had the most downloads in the history of the app. The stock fell fast with people only being able to sell the stock — it fell to $193.60 but weirdly didn’t have much volume of trades. This is when people started to notice what people call a short ladder. A short ladder is when one person sells a stock to another and then back and forth until the price drops to scare people holding the stock to sell, dropping the price even more.
If this is true, it would be very illegal — the SEC is now looking into the hedge funds and Robinhood. While the SEC has said their goal is to protect the small guy, I personally do not trust any government organization that says they’re going to protect us but that is just me. They opened up the stock back up to buying the next day but only allowed to have 2 stocks at one time and no options were allowed. The stock soared back up to $325. It was rallied by Mark Cuban, Elon Musk, and Portnoy who were outraged by Robinhood’s choices the day before.
Musk even went on a new exclusive app called Clubhouse to talk about the stock and bring on Tenev and grill him. After the rally on January 29 when the market opened on February 1, the stock started a steady decline that has not stopped declining and the shorts have ended most of their positions.
While the GameStop rally seems to be over, redditors took almost $20 billion and that was only on January 27 before they had to cover the short. So, it should be over $20 to $25 billion. The mainstream media has started to take notice of Wallstreetbets, but many of the original members are saying that they are being misrepresented. I agree with them. The media has written many stories on how Wallstreetbets’ next targets are Dogecoin or Silver but if you have ever been into the subreddit, you would know that there is zero talk about cryptocurrency in Wallstreetbets — it is the fourth rule of the group. Silver was never mentioned in the group before the price surge. Dogecoin and Silver both had a huge price soar but the subreddit had nothing to do with it, as there was no discussion in the subreddit about either of these currencies.
Dogecoin which is a meme crypto has a swing almost every time crypto comes into the news. Dogecoin also had the help of Musk as he said that if it reached a dollar, he would put the logo on one of his rockets. Silver had one of the highest amounts of shorts of any currency which was then pushed by other stock groups, not Wallstreetbets. The group itself has said that the media is using their name to pump stocks up, because now, when someone hears “Wallstreetbets”, they trust that the stock or currency will go up.
I am interested to hear what the SEC does and how markets change because of the fear of retail investors banding together. This event will go down in history whether it is because we saw a downfall of hedge funds or regulatory action on retail investors.