Annalisse Galaviz
News Editor

The Reddit thread r/wallstreetbets inspired individual investors to massively buy stock in GameStop, a seemingly “dying” company. This drove the stock price to over $325 per share (Jan. 29) from about $20 (Jan. 12) and costing hedge funds shorting the stock, most notably Melvin Capital Management, billions

In “shorting” the GameStop stock, hedge funds like Melvin Capital essentially bet that GameStop’s stock price would decrease, a likely bet given that GameStop stock has gradually declined for years due to the rise of digital videogame storefronts and poor investment in smartphone stores that accumulated debt. Melvin and other big Wall Street investors make their money in the stock market by noticing trends related to supply and demand — in GameStop’s case, they noticed decreased demand that likewise affected price. Hoping to make a profit, Melvin Capital borrowed shares of GameStop using brokerage loans, anticipating that their stock price would decrease so that they could buy the stock at the lower price and return their borrowed shares, therefore making a profit off the difference in GameStop stock price. 

However, this did not happen. There were so many average investors who rallied together to see r/wallstreetbets’ vision become a reality, and purchased so much GameStop stock that the price rose drastically, essentially creating demand where there was none. Moreover, hedge funds and professional investors that shorted the GameStop stock have been forced to buy more stock in order to minimize their losses, yet this action also drives the price up further. Overall, everyday investors seem to have “won” on investing by using market information of the hedge funds’ GameStop short squeeze, reversing the usual roles of everyday investors and professional investors of a higher income bracket.

For this reason, many view the massive GameStop investment as an act of class warfare, hitting the rich where it hurts: their wallets. However, given the investors’ humorous approach to basically pranking the rich, many critics also take the situation less seriously.

Since the GameStop investors bought their stock at such a low price, they can maximize their profit by selling their GameStop shares at these fluctuating, higher prices and profiting the difference. However, given the socio-economic implications of the everyday worker holding wealth — essentially power in a capitalist system — over the rich, many lower-income earners have discouraged investors from selling their stock, even taking losses, for the sake of costing the wealthy short-sellers money. At the same time, prices will likely fall again and cost investors money the longer they hold on because GameStop’s model did not generate its current demand without group action and many will sell their shares.

There is certainly some evidence to suggest the GameStop investment was part of a larger movement. Founder and former moderator of r/wallstreetbets Jaime Rogozinski said of his planned mass GameStop investment, “It’s the democratization of financial markets. It’s giving a voice to the people that didn’t previously have one,” in an interview with All Things Considered.  

Lower-income investors also poured money into other companies failing to adapt to digital markets. Most notably, stock in AMC theaters, which has notoriously struggled during the pandemic’s mass closure of indoor gatherings, saw stocks increase from $2 to $13 since 2021 began, according to Jan. 29 New York Stock Exchange data. Blockbuster, Nokia, Build-A-Bear, and Blackberry are other companies that saw stocks increase during the GameStop frenzy.  

Still, there will likely be negative repercussions to the GameStop investment. Firstly, banks may not have the physical money to pay those who sell their stocks, and other investors, such as the government, may be less likely to bail out these investors than their hedge fund rivals. Similarly, on Thursday, Jan. 28, Robinhood began raising over $1 billion from its investors to pay customers of trades while protecting its trading partners. Secondly, given that when hedge funds take massive losses, they typically liquidate, or sell, other investments in their portfolio, they may hurt the stock of unrelated companies for seemingly “no reason,” or without a change in demand or supply. 

Likewise, there has been some speculation as to whether the GameStop stock investment is illegal. This speculation comes from the allegations of securities fraud, such as lying about a stock, and market or price manipulation, which is much less clear cut. In order to convict Reddit investors of these charges, prosecutors would have to prove they spread false information, which is so far unsubstantiated. Though, purposefully bankrupting a hedge fund may be illegal. According to Bloomberg, market manipulation means that “if you buy stock with the purpose of pushing the price up so that other people will buy it, that’s market manipulation. If you buy stock hoping that the price will go up because other people buy it, that’s not market manipulation; that’s just normal.” Additionally, given that GameStop’s “real” market value based on daily operations prior to the surge is much lower than now, and investors may want to sell stock to make a profit from upper and lower tiers of decreasingly invaluable stock, some are worried the surge is a pyramid scheme. Analysts are unsure whether the GameStop investment is illegal, but regulators like the Securities and Exchange Commission have probed the subject and continue to monitor social media groups offering financial information. The White House also plans to investigate the GameStop trading. 

Photo courtesy of Macy Miller/ Quaker Campus.

It was initially smartphone investment apps like Robinhood that allowed lower income-earners like the r/wallstreetbets Redditors to invest in a simpler way and drive up GameStop stock. However, Robinhood controversially began limiting GameStop trades on Thursday by allowing users to sell but not buy the stock, and seemed to suggest more support for the hedge funds that took losses than more amateur investors, like Redditors, from further driving up the price of Gamestop as intended. Yet, Robinhood claims they were required to take this action, despite receiving no request for such from the FCC, due to technical issues and as a measure of “protections” for firms and customers. Likewise, other apps for stock exchange like TD Ameritrade and WeBull restricted trades of GameStop, AMC, and other fast-growing stocks on their platforms. This response may be illegal, given its limiting investments without proof of illegal activity, though investigations into its legality continue.

Unlike Robinhood, The New York Stock Exchange (NYSE) owns the GameStop stock’s listing, and could therefore choose whether to limit its activity due to reasons like fraud or other expectations from the company. On Thursday, Jan. 28, the NYSE temporarily stopped trading in GameStop shares multiple times before reopening to temporarily lower stock prices. 

Discord, a social media app for large-scale group communication, also temporarily banned the wallstreetbets server for both spreading and glorifying hate speech, and misinformation. Many members agree with Discord’s analysis of hate speech and say the server was racist and homophobic. However, many criticized Discord’s decision to remove the server only on the day the hedge funds lost so much money, though warnings had been sent months before. Currently, Discord is working with the server to moderate its guidelines

Given the socio-economic effects of the GameStop controversy, some critics of the stock market have called for higher taxes on capital gains, like the hedge funds and other professional investors make by investing in and studying trends in the market. This is because the tax rate is lower on capital gains than ordinary income, or income earned by working a typical job, which thereby seems to reward the rich for having money to invest with “less” effort than everyday citizens working full-time jobs. Others call for the prosecution of those involved or regulation for similar group activities. This may also pose an issue, given the similar group activities of wealthy investors — like the hedge funds that pooled their investments for short-selling and took a loss from the GameStop investment. 

While officials are still formulating responses to the GameStop controversy, for common people, the main takeaway has seemingly been a shift away from political party divides to an emphasized conflict instead between the rich and the working classes. Under a centrist and Democratic Biden administration, it is unclear what will come next for Wall Street and WallStreetBets. 

Featured image: Courtesy of Aubry Acosta/ Quaker Campus.

Author

  • Annalisse Galaviz is the News Editor for the Quaker Campus. She has worked for the paper since 2018 in former roles as a copy editor and news assistant. She likes writing about hard-hitting current events and, naturally, spends most of her time on political Twitter so she can do this. Assuming she has free time, she enjoys writing bad poems and fiction stories.

Annalisse Galaviz is the News Editor for the Quaker Campus. She has worked for the paper since 2018 in former roles as a copy editor and news assistant. She likes writing about hard-hitting current events and, naturally, spends most of her time on political Twitter so she can do this. Assuming she has free time, she enjoys writing bad poems and fiction stories.

Leave a Reply

Your email address will not be published.

Next Post

America & Games: Dead Rising’s Confused Take on Capitalism