You may be asking yourself: what the f*ck is going on in Wall Street? And this is logical, because all these recent events, most probably, will serve to tell stories, movies, and documentaries of how a group of stock market analysts, with small budgets and some quite inexperienced investors, managed to deliver the right hook to the chin to the wolves of Wall Street.
This is effectively a war between large and small investors, causing a major political controversy. What is is the story behind it?
A group of users on Reddit, the website known as the “Front Page of the Internet,” agreed to “troll” and hit the Wall Street hotshots where it hurts.
How did they do this?
Quite simply, there are two ways to invest in the stock market: a short position – renting shares waiting for them to go down to make money – or a long position, buying a stock going down to wait for the shares to go up and then sell them. The former has long caused much controversy. The latter is the classic in this stock and investment game.
Betting on a company losing value is often seen as unethical. According to Wall Street experts’ stock market analysis, you are betting on a company not succeeding.
That’s what happened with GameStop, the video game company now on everyone’s lips. This retailer with physical stores was affected by the pandemic economic crisis and the rise of internet shopping. Thus, market experts pointed out that the company had significant downside potential, and many companies bought put options. In other words, they bet on short positions in the hope that prices would fall.
That went south for them.
A number of Reddit users tuned in to buy GameStop stock and sent the stock soaring 144%.
“Dozens of users of a “subreddit” (subforum) called Wall Street Bets (WSB) have been for days encouraging each other to furiously buy GameStop shares, which today traded at nearly $160 per share, amid high trading volume and having started the year at just $17,” says an EFE article.
It has been widely commented that these users are mostly kids and teenagers who decided to prank Wall Street. But reality shows that there are many expert analysts perfectly capable of taking a swipe at the market’s big shots.
“WSB is single-handedly bringing down Wall Street. Power to the f*cking people. I’m so proud of all you illiterate retards,” one of the forum users wrote Monday, linking to a news story explaining that GameStop “short sellers” lost $1.6 billion.
These types of small investors like those on Reddit, who regularly use “trading” apps to play the stock market without commissions, bet on massive stock buybacks to boost the prices of other companies going through bad times like movie theater chain AMC, phone company Blackberry or retailer Bed Bath & Beyond, almost always going against Wall Street analysts and pundits.
GameStop was so strong that even Chamath Palihapitiya, CEO of Social Capital, and Elon Musk, CEO of Tesla and SpaceX, joined the initiative to trigger even more madness, causing more than one short wolf to pull several hairs out of his head.
And beware, a key part of all this is explained very well by the outlet 20 minutos, because all this did not happen only because Reddit analysts agreed to save a company that was going under.
When everything was going down for GameStop, “along came Ryan Cohen, the young former CEO of Chewy, an online pet food retailer. He bought a good number of shares and lobbied his managers to turn things around.”
“In November, he told GameStop’s board of directors that he had done a lousy job and that they needed to become little less than the Amazon of the video game industry. Two weeks ago, they made him and two of his friends from Chewy part of the board.”
This change of initiative from GameStop’s board of directors was not evaluated by the wolves of Wall Street but was by Reddit users who decided to trust GameStop against all odds.
One of the companies that suffered the worst of the move was the Melvin Capital fund, which suffered millions of dollars in losses and bow to Wall Street to get out of its short game and avoid bankruptcy. Another fund is Citadel, which is causing a great deal of controversy around the Biden administration.
But the story doesn’t end there.
Robinhood suspends trading
Following the euphoria surrounding the actions of seemingly financially dead companies such as GameStop (GME), Blackberry, and AMC Group, online brokerage platforms such as Robinhood Markets restricted the purchase of shares of these companies at the risk of losing millions of dollars to investment funds that had taken a short position in these companies.
Thousands of users of Robinhood’s platform did not take kindly to the blocking of stock purchases of these companies and filed a class-action lawsuit against the company, claiming that “Robinhood purposefully, willfully, and knowingly, removing the stock “GME” from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open market.”
Users also reported that Robinhood has begun selling GME shares from its portfolios without notice. Platforms such as Webull and Merril Edge have also imposed restrictions on the purchase of these shares.
And, surprise, this gets interesting, Citadel is an investor in Melvin Capital, both of which are affected by Wall Street Bets. Now, Citadel is also Robinhood’s largest client.
Reactions to the Wall Street frenzy
This was followed by widespread outrage on social media, with many arguing that, in general, this was a move that undermined the free market.
The desperation of several of the big wolves of Wall Street was such that many even began to call for regulations to the free market that they themselves dominated for so long just because smaller investors defeated them on their own turf.
The situation was so outrageous to many people that even progressive Senator Alexandria Ocasio-Cortez and Republican Ted Cruz had common positions on Twitter. Something that couldn’t have been more unthinkable.
In the face of the controversy, House Speaker Nancy Pelosi announced her intention “to review the GameStop issue” and assured that the Biden administration is also reviewing the issue. But what’s the point?
In the information that has come to light so far, there is no knowledge of abuse of market power or insider trading, or anything that violates market competition rules, so why should Congress be reviewing the GameStop issue?
On the other hand, there is something much more serious in this story and it ties directly to the Biden administration.
The investment fund, Citadel, as stated, one of the firms heavily affected by the GameStop case, has paid more than $800,000 in advice to Treasury Secretary Janet Yellen, according to a Daily Caller report.
“Citadel, a hedge fund founded by Ken Griffin, a major GOP donor, paid Yellen $810,000 to speak at various events between October 2019 and October 2020, according to Yellen’s filings with the Office of Government Ethics,” the article said.
After this came out, White House Press Secretary Jen Psaki said Yellen was monitoring the GameStop situation.
When asked by the press whether the Treasury Secretary will abstain from the Robinhood discussions, the Press Secretary responded that “It should not surprise anyone that she was paid to give her perspective.” Basically, the secretary did not even conceive of a conflict of interest in this whole situation.
Former President Donald Trump’s son, Donald Trump Jr. wrote on Twitter that “Any Republican in Washington DC worth a damn should be calling for an immediate investigation into Robinhood and Citadel. And while they’re at it, subpoena Janet Yellen and let’s find out if there was pressure coming from the Biden admin to protect his cronies on Wall Street.”
It would be exceedingly dangerous if, in the face of what is happening on Wall Street, regulators were to stick their hands in to prevent mutual funds from losing money.
Over and above the rationality of buying GameStop or Blackberry stock, no investor should be deprived of the freedom to invest their money as they wish.
Otherwise, there are thousands of stocks that are behaving like a bubble according to many analysts, without Wall Street regulators doing anything about it. So how is this any different?