INSIDE THE GAMESTOP STOCK WALL STREET CHAOS
This past week, Subreddit r/WallStreetBets has started a stock market frenzy, as its members drove GameStop’s stock prices from around $20 to well over $300. As time went on, the r/WallStreetBets community targeted other unlikely stocks such as AMC, Blackberry, and Tootsie Roll.
Let’s start from the beginning, shall we? A year ago, a user argued that GameStop was underpriced by the market, and the stock would go up, so they posted about how they were buying GameStop options [contracts]. For a while, the idea that r/WallStreetBets would take over GameStop was a joke, but before you know, it turned into a crisis. The idea was to punish short-sellers and investment firms, and retail investors to take over Wall Street.
Ready for the breakdown? If you think a company such as GameStop will fail and the stock will go down, or even that the company will go bankrupt, there’s a way to make money on that. In most cases, this is done by short selling — a practice where you borrow shares for a fee and sell them for a higher price, then repurchase them at a lower cost to return them. You can capitalize big time on this, especially if the company goes bankrupt and you don’t have to return the stock! But wait, there’s a catch, you lose money if the stock goes up, and your losses are potentially infinite if the stock keeps going up. Worst case scenario, some shorts will be forced to repurchase the stock at a high price, which sends the price even higher. In other words, they would have to “cover.”
The crisis caused GameStop short-sellers to be bamboozled out of about $5 billion 26 days into the new year. Due to the increase in the purchase of the stocks among retail investors, the investment firms lost billions on their return, and Robinhood blocked the purchase of them. Robinhood had to find emergency cash to continue to be able to trade. It froze users from buying several heavily traded stocks and draw on a more than $500 million bank line of credit. The company also took an emergency infusion of more than $1 billion from its existing investors.
“The trading restrictions implemented by Robinhood are a clear example of market manipulation designed to protect big banks and hedge funds,” Phillips said. “The app claims to want to ‘democratize finance,’ but their actions over the past 48 hours have served to silence individual investors, including thousands of Oklahomans. I am calling on Attorney General Hunter to open an immediate investigation into the actions taken by Robinhood.”
After the frenzy, r/WallStreetBets was banned from Discord for hate speech. Since then, Discord has come to amend and allowed them back onto the platform under one condition, to follow their community guidelines. On the other hand, Robinhood has been charged by the SEC (Securities and Exchange Commission) for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the reasonably available terms to execute customer orders. Robinhood paid a $65 million settlement.
