February 4, 2021
What Happened?
Members of a subreddit called R/wallstreetbets have purchased heavily shorted stocks such as GameStop (GME) in a coordinated “short-squeeze” and have lost hedge fund managers millions, if not billions of dollars.
What is a hedge fund?
A hedge fund is a group of investors who use risky methods for more considerable gains. They invest with loans, short sell stocks, use derivatives, and use other dangerous methods. Hedge funds are generally only accessible to wealthy, high profile investors.
Timeline of Monday-Friday:
On Monday, GME was traded more than any S&P stocks and more than doubled in value.
On Tuesday, public figures such as Elon Musk and Chamath Palihapitiya further publicized GME, which rose to almost $150.
On Wednesday, Citadel and Point72 had to give Melvin Capital, a hedge fund that shorted Gamestop, nearly $3 billion to clean it up.
On Thursday, GameStop fell 44% after popular trading apps such as Robinhood closed trading to the public.
On Friday, Robinhood limited trading to only one share per person. Robinhood also restricted 37 more stocks with excitement around them. GameStop overall rose more than 67% on Friday.
Aftermath:
Short sellers have lost $20 billion. Most people agree that GameStop’s rise will end soon, and the Securities and Exchange Commission will be investigating volatility in the stock market.
What happened:
The popular stock trading app Robinhood has banned users from buying certain stocks that were shorted by investors and advertised by Reddit users (Redditors.)
Why?
Well, there are some differing opinions on why Robinhood decided to ban users from trading certain stocks. Before Robinhood made any statements, most people thought they were aiding hedge funds that pay Robinhood for order data. However, according to Robinhood’s CEO, they closed trading because of net capital and deposit obligations.
What does that even mean?
Basically, to be able to ensure liquidity, stock trading platforms have to pay cash to regulatory commissions based on the predicted trade volume, or amount of trading, that happens in a day. In Robinhood’s case, the organization is the Depository Trust Co. or DTC. However, Robinhood has never outright confirmed that the DTC was a factor. Robinhood’s CEO also has stated that liquidity issues were not a factor in closing down individual stocks’ ability to be traded.
Wait, what about not having enough net capital?
Though claiming that liquidity was not the reason for Robinhood shutting down trading, the CEO proceeded to raise $1 billion to reopen trading.
What happens next?
Political figures have been advocating for hearings. New legislation is in the works, involving transaction taxes, reinstating minimum spreads, or limiting the ratio of shorts to outstanding shares. The Securities and Exchange Commission also is going to keep a close eye on Robinhood.
What’s Happening:
Wall street partners are pressing for legal action against members of the r/Wallstreetbets subreddit. One former member of the Securities and Exchange Commission claims redittors engaged in an illegal “pump and dump” scheme. Others claim market manipulation occurred.
What is a “pump and dump” scheme?
A pump and dump scheme refers to a group coming together to raise a stock’s prices by unethical means and then all selling and obtaining the profits. Others who purchase the stock when it is of higher value don’t sell and then lose large amounts of money after the stock’s price goes down.
So, what happens next?
There are around 3 million members of the R/Walstreetbets subreddit. Investigations would be long and drawn out. However, the Securities and Exchange Commission will be investigating hedge and private funds, as well as more issues in Wall Street.
