The buying frenzy of heavily shorted stocks – among them GameStop, Nokia, BlackBerry and AMC what some have dubbed the ‘Reddit Rebellion,’ has already forced major funds to spend in excess of $70 billion to cover their shorted stocks, $20 billion on GameStop alone as of Friday inflicting massive losses on Wall Street hedge funds who bet on the companies’ demise.
Robinhood froze purchases in what it called “risk mitigation,” even force-selling some users’ shares, the game retailer was back up on Friday after the platform resumed “limited” trading, rocketing by more than 67 percent. AMC’s value also soared some 54 percent for the day, though both BlackBerry and Nokia fell by around 3 percent, at the tail-end of a rollercoaster week for all four stocks.
The unprecedented short squeeze has triggered concerns that the effects will surge through the financial markets, forcing the hedge funds who bet against the stocks to sell off other securities to raise cash. However, some analysts have argued that the pain on Wall Street is long in the making,
1. GameStop is an electronic retailer that has struggled over the past years. The store has failed to make profits and has been its shutting stores. The stock prices of GameStop have been on the lower end and the company was believed to be a subject of a common market practice called ‘short selling’.
2. Short Selling is a practice where Wall Street Hedge Funds and money managers borrow stocks of a small company to sell if the stock price goes down in future. These fund houses bet on the failure of a company and make money on its loss.
3. In case there is a positive news about the company and its share prices go up, these fund house buy more stocks to cut their losses. They keep injecting money to keep the stock afloat. GameStop was one the most shorted public company.
4. However, it’s fortunes changed over the past few weeks when the stock prices started going up. The GameStop share was trading at $350 on Wednesday, compared to less than $18 a share earlier this month. The stock has skyrocketed by over 2000 percent this year itself.
5. This was because of group of users came together on Reddit through stock market threads including wallstreetbets to share their ideas and create buzz around GameStop stocks. The community currently sits at 4.7 million users and kept pushing the price of the stock also forcing the hedge funds to invest more money in them.
6. These investors used trading apps such as Robinhood that do not depend on hedge funds or money managers and allows direct investment. The users put money in several stocks including GameStop, Blackberry and Nokia using the same trading app. The continuous push helped these users squeeze the short sellers.
7. As a result, several hedge funds have suffered massive losses. S3 Partners, a financial data company, said Wednesday that its analysis found that short sellers had lost $23.6 billion on GameStop this month. On the other hand, users on Reddit have claimed to make big profits, having bought GameStop shares for less than $20.
8. Realising what is happening, Robinhood announced that users will not be able to trade in handful of stocks, including GameStop, Nokia, Blackberry, AMC, and American Airlines, due to “recent volatility.” It lot a decline in the stock prices and a lot of anger among the investors.
9. The trading app has been hit by a lawsuit for its decision to block users from investing in stocks. The situation is so serious that even White House and financial regulators are also monitoring it.
10. Several hedge funds have come out and complained against the way Reddit users pushed the stock price. However, it has been matched with mixed response. Tesla chief Elon Musk seemingly urged individual investors to punish hedge funds for short selling, tweeting “Get Shorty.”