Remember GameStop? That old shop where you would go to buy second hand video games? Well, yesterday they made big headlines…and here’s why.
Understanding a Short
A short position is a trading technique, whereby short-sellers will borrow a stock that they think will drop in price, and buy them back at this lower price. Short sales have an expiration date- which means that sometimes short sellers have to act fast.
A short squeeze occurs when the opposite happens; the stock sharply rises, forcing all those who predicted its downfall to buy to prevent even bigger losses. This inevitably drives the stocks even higher. Short squeezes can happen when there is an unexpected positive news story (like Tesla, for example), or anything that can excite new buyers.
So what does that have to do with GameStop?
In January 2021, a series of short squeezes ensued on several different stocks, including GameStop, AMC (remember, that cinema company?) and BlackBerry (everyone’s dream phone 15 years ago). Retail traders on Reddit page ‘Wallstreetbets’ banded together to drive the price of these stocks up, because they had found out that several hedge funds had short-sold them. This resulted in large price spikes, as the short-sellers were forced to buy back their stocks before incurring any more losses.
Many users saw this as a way of getting back at hedge funds for the economic crisis in 2008. (Side note, if you haven’t watched The Big Short- you should. It explains the property crash perfectly.) It was almost as if all these users had become vigilantes, taking on the Big Bad Wall Street. Some on the website even donated their earnings to charity- how Robin Hood-esque of them.
Robinhood; take from the rich give to the…rich?
What’s not so Robin Hood-esque is what Robinhood did. Robinhood is a stock trading app; on Thursday 28th Jan 2021 it announced that it would block trading of GameShop, AMC and Blackberry shares. The free stock trading pioneer only allowed clients to sell positions, not open new ones. This provoked outrage among users and US politicians alike. A class- action lawsuit accused Robinhood of market manipulation and there are calls for the company to be investigated. The Senate banking committee said it would hold a hearing into the volatility.
Many believe that this kind of move from Robinhood shows clear classism and bias in the financial world; that hedge funds in Wall Street can influence stock fluctuations, fat cats can reap the spoils of market volatility, but the average joe can’t. The users on Reddit merely played the short-sellers at their own game. What’s your opinion? Do you think that Robinhood was in the wrong? Or do you think that the stock market shouldn’t be manipulated by Reddit users?