Since Thursday the chief topic of Wall Street is GameStop – a video game retailer whose stock price dramatically exceeds what most people think of it. So, what happened in the stock market because of Reddit users?
Reddit‘s users in a group called WallStreetBets noticed that hedge funds had taken a large short position in GameStop. They decided to punish the Wall Street big boys and launched a co-ordinated buying spree. That began forcing the price up – it is now up more than 1800% – increasing the losses for the short-sellers who had bet against it.
According to an investor and former hedge fund manager Mike Novogratz the internet activity can be a real disappointment for investors often cannot take advantage of lucrative opportunities such as IPOs (initial public stock offerings).
How did GameStop appear in the middle of all this?
GameStop was the subject of short selling. This means that investors borrow shares to sell and then buy back later, so they can get them back, allowing to take profits if the share price falls. Thus, they bet on the companies’ fail. And then GameStop became the source of a short selling.
Since short sellers like hedge funds are essentially betting on the company’s success, which can be risky. Any enthusiasm or positive news for the stock will drive up its value, minimizing the profit for the short seller. As In the case of GameStop, chatter on massive online trading forums spurred interest in buying stocks, pushing up the price, which in turn sparked more interest.
As a result of speculative trading, the short sellers no longer had stocks left to buy to cover their positions. According to a financial data company – S3 Partners’s analysis short sellers had lost $23.6 billion on GameStop this month.
Shares of GameStop and other companies plummeted in regular trading Thursday, even as leading brokerages moved to limit trading in the stocks — a decision that infuriated lawmakers and the ordinary retail investors who had used those stocks to wage a populist war against big Wall Street hedge funds.
GameStop shares fell 55%
Shares of GameStop fell sharply in regular trading on Thursday. Robinhood and Interactive Brokers, two of the most popular online trading apps for retail investors, have announced they will restrict trading to the stocks of the most active users. Robinhood and Interactive Brokers’ actions followed days of wild trading that resulted in huge gains for some stocks. After the restrictions were imposed, GameStop shares fell 55%. This activity has raised questions from regulators who monitor the trade on illegal activities.
On online forums, the amateur investors discussed lawsuits and accused Robinhood and other brokerage companies of adopting their own form of market manipulation by restricting the purchase of certain shares.
But stocks of the target companies increased after Robinhood said it would allow “limited purchases” of the names that had been restricted from Friday – GameStop, AMC, BlackBerry, Koss, and Nokia
“We will continue to monitor the situation and can make adjustments if necessary,” the company said in a blog post announcing the decision.
The Reddit’s message board, as well as WallStreetBets, went private for a while on Wednesday night. Shortly thereafter, in a message after the forum was unlocked, the moderators wrote that it had “grown to the kind of size we only dreamed of in the time it takes to get a bad nights sleep. We’ve got so many comments and submissions that we can’t possibly even read them all, let alone act on them as moderators.”
