What the GameStop Short Squeeze Says About Our Economic Future
In January 2021, almost every person in the world could hear a rocket blaring into the atmosphere. The rocket’s name was GameStop, and with the help of the on board crew, it was headed straight for the moon, leaving behind an American financial sector that had been completely flipped on its head. The stocks of companies deemed obsolete in today’s age, such as AMC Theatres, BlackBerry, and most notably GameStop, had unexpected soars to all-time highs, which completely shattered the market. What makes this phenomenon so unique from previous stock market booms, though, is that it originated from an online internet discussion forum.
The stock market has been fundamentally twisted and broken by hedge funds on Wall Street. Day in and day out, they manipulate the market so that it always plays out in their favor. Whether it’s artificially inflating a stock, shorting a stock (betting against the stock), or using the ‘short and distort’ method, in the end, the stock market is just a little game to them—a game where Wall Street always ends up on top. For far too long, hedge funds on Wall Street have been making billions of dollars through manipulation while 78 percent of workers in the United States live paycheck to paycheck. Even the U.S. government—the highest authority in the land—hasn’t been able to enact sweeping reform that would democratize the stock market. The recent phenomenon with GameStop, however, has opened a new national discourse that may just end up changing the future of the stock market as well as the economy as a whole.
It all started when r/WallStreetBets, a subreddit of ragtag internet jokesters with an affinity for investing in the stock market, caught wind of an initiative undertaken by multiple hedge funds to short various stocks, with the most notable one being GameStop. In a nutshell, these hedge funds put billions of dollars into shorts in hopes that stocks such as GameStop and AMC would plummet for a very substantial payoff.
Investor and famed frequenter of r/WallStreetBets, Keith Gill, was one of the key players to bring attention to this shorting plot. What he uncovered was that hedge funds had shorted over 100 percent of GameStop stock, with other stocks being shorted by massive amounts as well. In essence, these hedge funds put a lot of money into these shorts.
When hedge funds short stocks, they don’t only hope the stock falls—they actively try to push it down by publicly proclaiming the stock is doomed to fail in hopes that people will panic and sell their holdings. For example, Andrew Left, the founder of infamous short seller Citron Research, called GameStop a “failing mall-based retailer.” To the hedge funds and investment firms, it’s all a game to make more money. What they don’t realize is that bringing down a company means people lose jobs, which especially during the COVID-19 pandemic, could have detrimental consequences on a person’s life.
After attention to this scheme was brought to r/WallStreetBets, the subreddit banded together to strike back against the hedge funds. They began buying GameStop stock en masse, leading to its price exploding from $39.12 on January 20 to an all-time high of $347.51 by January 27.
From their gains in the market, some redditors were able to pay off their student loans. Others decided to pay it forward, like Hunter Khan, a twenty-year-old who cashed in his GameStop earnings to buy six Nintendo Switch consoles, which he then donated to Children’s Minnesota Hospital in Minneapolis.
The GameStop short squeeze made short sellers lose more than $5 billion, with the biggest losses being suffered by hedge funds and Wall Street investment firms. In fact, hedge fund Melvin Capital lost so much money that it needed a $2.75 billion investment from Citadel and Point72 Asset Management to help cushion the nearly 30 percent loss it sustained.
Financial analysts and so-called ‘experts’ on outlets like Fox Business and CNBC decried the actions of the WallStreetBets redditors, going so far as to call their actions illegal for artificially manipulating the market.
But were the actions of the folks over on WallStreetBets really illegal? Most likely not. In order for this action to have been illegal, there needed to have been numerous manipulators who intentionally colluded so that they could have the collective power to change the stock price. Merely suggesting to others on an online forum that they should invest in GameStop doesn’t appear to be a particularly strong form of collusion.
In fact, it’s actually easier to argue that shorting a stock and then subsequently going out and giving that stock bad press just to push down its price is market manipulation—and hedge funds have been doing that for decades without any repercussions. Now all of a sudden when the average American profits off the stock market, it’s illegal. In the eyes of the hedge funds, they’re the only ones who can play the stock market and win. Unfortunately, though, it seems that the hedge funds do always win.
Redditors were confident in their mission to rocket GameStop’s stock all the way to $1,000 a share. The WallStreetBets subreddit had gained millions of new followers in only a matter of days and everyone seemingly wanted a bat to pummel the hedge fund piñata. The day after GameStop had hit $347.51 a share, the stock trading app Robinhood halted the trading of GameStop stock as well as many other popular stocks on the WallStreetBets subreddit such as AMC, BlackBerry, and Nokia. The only thing that one could do was sell their stock. What happened is exactly what you’d expect: stock prices began plummeting. Something smelled very fishy.
A little bit of digging revealed that trades on the Robinhood platform are actually sold to large firms, which is why the app doesn’t require the user to pay commission fees when buying stocks. The cherry on top is that Robinhood’s largest customer is Citadel Securities, one of the firms who tried to bail out Melvin Capital. Robinhood—whose mission is to “democratize finance for all”—is just another pawn for the hedge funds.
Robinhood received widespread criticism from people all across the world and the political aisle. For once, we saw Democrats and Republicans actually agree on an issue. Currently, Robinhood faces roughly 90 lawsuits for their actions.
Robinhood must be held accountable for what they’ve done, and a thorough investigation should be conducted to get to the bottom of this fiasco. If found guilty, a unique punishment should be in order. Normally, anyone with a Robinhood account can receive a free stock usually valued at $2.50 to $10.00 if they can get a friend to sign up and link their bank account with the service. Well, what if Robinhood were to instead give every user a free stock valued at a minimum of $20? I think it’s a fitting punishment that will actually serve to “democratize finance for all.”
The following day, Robinhood reallowed trading for the previously halted stocks. The damage had already been done, however, and the prices never recovered to their former glory. There was widespread public outcry from both sides. The people who invested in GameStop were out for blood—namely Robinhood’s blood. Wall Streeters, on the other hand, demanded action be taken against the short sellers on r/WallStreetBets. So what exactly will become of the stock market? If the GameStop short squeeze is what it takes for Congress to finally enact some comprehensive reform to prevent market manipulation, I’m all for it.
There’s already been some very noteworthy reform floating around in the political atmosphere that would make for a more stable and safe economy to protect from the behavior exemplified by Wall Street. One such reform is a financial transactions tax, which was proposed by Bernie Sanders. This would tax stock trades at 0.5 percent and bond trades at 0.1 percent, a significant increase compared to the 0.002% transaction fee the Securities & Exchange Commission currently imposes on trades. In doing this, Wall Street would be restricted from the rapid-fire speculation they’re all too well known for. This would put a buffer in between Wall Street and the market, and would be a big leap in preventing these bankers from further manipulating the market.
Another important piece of reform that goes beyond just regulating the stock market is the reinstatement of the Glass Steagall Act, which was passed under Franklin Roosevelt’s administration in 1933 and repealed by Bill Clinton in 1999. This would deconsolidate commercial and investment banks from working together and prevent too-big-to-fail banks from forming and crashing our economy as they did in 2008. Together, these two key reforms would make the market much safer for the average citizen and would stabilize the economy as not to create another financial crisis. In reality, though, the red tape and corruption in Washington make it very unlikely that reforms like these will be passed.
As Congresswoman Alexandria Ocasio-Cortez pointed out, Wall Street has been treating our economy like a casino for decades. They crashed the economy in 2008, and what happened to them? They received trillions of dollars in the form of a bailout by the federal government. During the 2020 stock market crash, the trend continued as the federal government gave Wall Street billions in bailouts while the average American received a measly $600 check.
Despite some outliers, the overwhelming majority of the elected officials in the U.S. government stand firmly with Wall Street. Even through all of their efforts at manipulating the market and gambling our economy away, Wall Street hasn’t been heavily regulated because, simply, it rakes in a lot of money, and many of our politicians are bought and owned by them to do their bidding. If anyone will be regulated in the stock market because of this recent phenomenon, it will be the average American. While it’s true that a new discourse on regulating Wall Street has blossomed from this phenomenon, it just seems that congressional action may be wishful thinking.
It’s possible, however, that the GameStop short squeeze has taught Wall Street a lesson that doesn’t need to be enforced by Congress. In a way, we’ve sent the bankers and hedge fund managers on Wall Street a very clear message. It’s a message from we the people saying that we have just as much a right to participate in and profit from the stock market as the billionaires on Wall Street, and if we the people catch wind of another attempt to short a stock, you can bet your bottom dollar that we’re going to squeeze you out.