by Christian Asdourian
February 22, 2021
Wall Street was recently taken by storm when a group of Redditors skyrocketed the stock value of the retail store Gamestop.
In January 2021, a group of everyday people from a community forum called “r/wallstreetbets” on the popular website Reddit took it upon themselves to help alleviate the financial stress placed on GameStop. Their actions were a response to the tactics used by professional Wall Street investors who were planning on profiting from the decline of GameStop’s stock value. If you’ve seen the movie The Big Short, you’ve probably heard of the term “short selling” and may or may not have pretended to understand what it means. In essence, short selling is when investors sell stocks from a company with the knowledge that their value is going to decrease. They can then buy back the stocks cheaper and keep the difference as profit. When Redditors such as u/DeepF-Value and u/Stonksflyingup realized that GameStop was being heavily shorted, they began encouraging private retail investors, or individual, “little-guy” investors, to purchase GameStop stock. Before long, the cost per share of stock shot up to a whopping $483 at its peak from a measly $17 earlier in January.
Melvin Capital, one of the hedge funds that was shorting GameStop, was forced into a short squeeze and had to buy back stock to cover their losses. They eventually left their short position on GameStop, with a loss of over four billion dollars in assets last month. But Wall Street was not going to go down without a fight. Initially, investment apps like Robinhood were the primary means that private investors were using to buy up GameStop stock, until these apps placed trading restrictions on GameStop and over ten other companies because of “significant market volatility.” This caused a massive uproar among the public and users of the app because of allegations of market manipulation. Several politicians voiced criticism of Robinhood’s actions, including Representative (D-NY) Alexandria Ocasio-Cortez, who called for an investigation into why Robinhood acted to “block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”
Given everything that took place, I asked Jonas Rajagopal ‘21, club leader of the Stock Market Club, to share his thoughts on these events.
How do you feel about this whole situation?
I thought the situation was exciting. It is always fun to see Wall Street lose (though they made back most of their losses later in the saga). I think the main problem is not what happened on Reddit. It is that big hedge funds have been able to do this without punishments. They can donate to politicians to prevent the rules from changing. For example, companies like the Motley Fool can buy a stock, then invent phantom reasons to say it will rise, and their followers will buy the stock, and they make a ton of money.
Do you think the future of stock exchange is in jeopardy? Why?
I do not think the future of the stock exchange is in jeopardy. There may be some regulatory changes to prevent events like this from happening again, but anyone saying that this is the demise of the stock market is overreacting.
What do you think about the responses from companies like Robinhood and Wall Street itself?
Initially, I thought the response from Robinhood was unacceptable. As I have learned more about the situation, I believe they had little choice. I also think their PR was a disaster and they could have handled it better. I think the system failed the “little-guy” investors. I also think trading should have been completely stopped by the NASDAQ, not just on Robinhood, and not just to prevent selling the shares.
As of now, the massive increase in value for GameStop stock has plummeted back to earth. Although the company and stock value is in a better place than when it started, this saga has a bit of an unsatisfying conclusion, especially to those who were hoping that the stock’s price would keep on climbing. Regardless, what happened with GameStop is a historical moment for Wall Street. Even the little guys can influence the stock market if they work together, and GameStop is only the beginning.
Aliaj, Ortenca, Mackenzie, Michael, and Fletcher, Laurence. “Melvin Capital, GameStop and the road to disaster.” Financial Times, February 13, 2021.
Burbridge, Mark. “Redditors Vs Wall Street: The GameStop Situation Explained.” The University News, February 8, 2021.
Ingram, David and Bayly, Lucy. “GameStop? Reddit? Explaining what’s happening in the stock market.” NBC News, February 7, 2021.