Access to the stock market has never been available to more people. That fact was really felt after a group od Reddit users decided to bet against Wall Street insiders and a powerful hedge fund. And so far, they seem to be winning. This “financial revolution”, “OccupyWallStreet 2.0”, as some have described it, was not appreciated by the established traders, who quickly started accusing the so called “retail investors” for market manipulation.
It all started in subreddit called WallStreetBets, which is dedicated to sharing information and advice on the stock market. Members of the subreddit discovered that a hedge fund Melvin Capital held substantial short positions on the company GameStop. But why is that important?
“Shorting” describes an operation where traders bet against the stock, profiting if it goes down. The traders borrow the stock, sell it, and later buy it back to return it to the lender. If the stock goes down enough, the traders make a profit. However, if the stock goes up, the potential losses are limitless, since there is no theoretical limit to how far the stock can go up. Short selling does have a function in the market, but it hold substantial risks, which is something that hedge fund managers are certainly aware of.
Melvin Capital reportedly held a short position worth more than $55 million in GameStop. That is where the reddit traders come in. Armed with apps that allow zero commission trading, they decided to test that short position, and began buying up the GameStop stock on a massive scale.
Soon, the stock price began to rise, and hedge funds that shorted the stock started losing money. However, rather than walk away from the trade, hedge funds like Melvin Capital decided not to nudge, and continued shorting the stock. As they had to buy back the stock to short it again, this pushed the stock price even further. Soon, a company that was previously valued at $6 crossed the $100 mark.
All the while Melvin capital continued to short the stock, taking losses. While it is impossible to estimate the losses at this moment, the company was bailed out by hedge funds Citadel and Point 72 with an infusion of $3 billion.
The stock was pushed up even more when one tech company CEO and avid twitter user Elon Musk brought attention to it. Shortly after Elon Musk tweeted about WallStreetBets, GameStop stock surged a further 157%.
Michael Burry, a hedge fund manager and the founder of Scion Capital called the events “unnatural” and “insane”, and welcomed a regulatory crackdown.
If I put $GME on your radar, and you did well, I’m genuinely happy for you. However, what is going on now – there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous”, Burry tweeted.
The authorities are “concerned” as well. William Galvin, Massachusetts top securities regulator stated that there is something “systemically wrong” with the options trading surrounding the stock.
“This is certainly on my radar,” Galvin said to Barron’s. “I’m concerned, because it suggests that there is something systemically wrong with the options trading on this stock”.
Many have seen these calls as further proof that the stock market is rigged in favor of the insiders. When things are going well for them, then that’s capitalism. However, when things don’t go their way, then the system we need to bail them out, just like in the market crash of 2008.
However, for many people the trade is about more than just money. It was about punishing Wall Street insiders who, as many believe, have been playing a rigged game for decades. Melvin capital has exposed themselves to risk willingly, and they are not backing down. Why not let the big players experience a bit of market discipline for a change?