WTF Is Going On With Reddit, GameStop, And The Stock Market?
A group of Reddit users have managed to surge GameStop and AMC Theatres’ share prices, putting major hedge funds in hot water.
Small traders on Reddit waged a coordinated attack on big Wall Street players, investing in seemingly failing companies including GameStop and AMC Theatres. So what happened?
GameStop, a gaming and electronics retailer that appeared headed for bankruptcy, saw its shares spike by more than 1,750% from the beginning of this year alone. The company’s shares were worth approximately $39 each on January 20, but by the morning of January 28, they surged nearly 10 times to roughly $469 a share. AMC Theatres, one of the largest movie theater chains that took a major hit during the COVID-19 pandemic, also saw shares increase more than 600% this year, according to Market Watch.
On Thursday, financial technology company Robinhood, whose app is popular among young people because it makes the stock market more accessible, announced it would restrict transactions for companies including GameStop, AMC Theatres, BlackBerry, Nokia, and more. Other financial service companies including TD Ameritrade, Charles Schwab, and Interactive Brokers Group have all enacted similar restrictions on trading shares of various companies, according to Market Watch.
How did Reddit take on Wall Street?
The astronomical jump came from a group of small or independent traders on the subreddit r/Wallstreetbets. On the discussion board, thousands of Reddit users have been hashing out their plans and coordinating to drive up the share prices of struggling companies. In addition to GameStop and AMC, traders have driven up BlackBerry stock as well.
The jump in share prices has resulted in billion-dollar hedge funds including Melvin Capital losing money, CNBC reported. Larger traders are feeling the effects because their “short selling” strategy basically failed.
The strategy, also called “shorting,” entails betting against a stock or in hopes that its value will plummet, so that investors can make a profit when they buy back the stock at a lower share price. Unfortunately for these larger traders, the small investors driving up the share price of companies, including GameStop and AMC, derailed that strategy. The hedge funds got tied up in what’s called a “short squeeze.”
AMC CEO Adam Aron told Market Watch that the stock price surge could help the company escape bankruptcy in 2021.
“With any kind of partial recovery of the movie theater industry, this will get us all the way through 2021,” Aron said. “Imminent bankruptcy is completely off the table. We believe we have the runway we need to get through this pandemic.”
So, did Reddit eat the rich?
Both Citron Research and Melvin Capital have abandoned their short positions after GameStop’s stock skyrocketed. And while it’s not immediately clear how much both hedge funds lost, Melvin Capital sought a $2.75 billion bailout, according to the Wall Street Journal.
Tesla CEO Elon Musk and former Facebook executive Chamath Palihapitiya this week lauded the r/Wallstreetbets traders on Twitter, which further propelled GameStop’s meteoric rise. Some small traders have claimed they’re now able to pay off student loan debt, and others in another subreddit r/WSBgivesback said they’re donating their earnings to charities and organizations.
Some people have called out the trading companies’ decision to restrict transactions, which seemingly favors the larger hedge funds over the individual traders.
Is this even legal?
The Securities and Exchange Commission put out a short statement on Wednesday, saying it was “aware of and actively monitoring” the Reddit-inspired “market volatility.”
“Consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants,” the SEC wrote in a statement.
White House Press Secretary Jen Psaki said Wednesday that the administration’s Treasury Secretary Janet Yellen, formerly chair of the Federal Reserve, was monitoring the situation.
Correction: A previous version of this story said Robinhood would restrict transactions for Best Buy. This story has been updated to reflect that Robinhood did not restrict transition from that company.