The Power of Collective Protest – Redditors vs Hedgefunds

It’s a strange day when Ted Cruz, Alexandria Ocasio-Cortez and Donald Trump Jr all agree on something but on Twitter – Thursday the 28th of January 2021 that’s exactly what happened. The trio added their voices in a rising chorus of condemnation at popular stock trading app Robinhood’s decision to restrict trading of GameStop (GME), AMC Cinemas (AMC) and Blackberry (BB) stocks. This decision was the result of a remarkable week which has culminated in a David vs Goliath battle between small investors and the big financial institutions of Wall Street.

It all started earlier this week on the popular Reddit forum r/WallStreetBets where amateur small scale investors gather to swap tips and discuss investment strategies. A Redditor on the forum had been following which companies’ hedge funds had taken out short trades and noticed that the American company GameStop was now in the hedge fund’s crosshairs.

Short selling made simple – Diagram
Short selling made simple – A guide

They had taken out huge amount of short trades against the struggling company with the full intention of driving the stock price into the ground. The likely outcome of this was GameStop being forced into bankruptcy, the very definition of disaster capitalism. The company had been struggling for years having committed to bricks and mortar stores in an era of increased digitalisation of the gaming industry and the pandemic only served to cause further pain. This placed them within the sights of the hedge funds making them an ideal candidate for ‘shorting’ and the buzzards were circling.

For those reading who do not spend what little free time you have trading stocks, congratulations, that is a healthy way to live your life, however it makes understanding recent developments difficult. A ‘short’ in the world of trading is when someone borrows stock from a broker and then immediately sells it at the current market price. They then gamble that the value of the stock falls so they can then buy it back at the reduced price and then return the shares to the broker while pocketing the difference. For years this casino trading was the exclusive domain of billion dollar hedge funds, titans of the financial sector but this week that all changed.

The Redditor who noticed the short trades on GameStop managed to convince many who frequented the forum to launch a daring crowd-sourced counter-attack to buy as much GameStop stock as they possibly could thereby pushing the price of the shares through the roof. In December 2020 GameStop shares were worth around $20 a share, by the 27th that same share was worth about $350. Overnight the financial chessboard was upturned and the hedge funds who had taken out the short trades against GameStop were in hot water as their short positions started to lose billions. Hedge funds such as Melvin Capital worth $13bn were forced to close their short positions by buying back the stock at hugely increased prices which then sent the value of the stock soaring even higher, this is what’s called a ‘short squeeze’. This inflicted massive losses upon Melvin Capital leaving them bankrupt, reliant upon a bail out of $3bn from their backers Point72 and Citadel. As of writing the stock is still riding high at $325 and the Redditors are currently combing through other stock to see which shorted stocks they can squeeze with the full intention of bankrupting more hedge funds.

In response, on Thursday the 28th, Robinhood the popular retail stock trading app halted trading on the Reddit targeted stocks citing consumer protection as it’s motivation. Other tradings apps soon followed suit and almost instantly class action law suits were filed in multiple States citing market manipulation. However, whether these actions will be successful in a court of law remains to be seen. As of writing, Robinhood has lifted it’s embargo but has instead imposed ridiculously low buying limits and there has also been reports of forced sales of GME stock through the app.

The fallout on social and mainstream media has been spectacular, with hedge fund managers and other Wall St heavyweights taking to Twitter and TV to bemoan the unfairness of it all and that they are the target of an ‘attack upon the rich’.