the westminster news
Published by the students of Westminster School
By Keegan Bankoff ‘22
Image Credit: The New York Times
The date is Jan. 22, 2021, the third week of the new year. In the previous three weeks, the United States has witnessed an attack on the Capitol building, the impeachment of President Trump, and the inauguration of President Biden. It seemed as if things couldn’t get crazier -- but then the stock market spiraled into a frenzy. It all started as a joke when members of a Reddit forum decided to mass-invest in the stocks of crumbling companies, specifically Gamestop.
This forum, known as r/WallStreetBets, is composed of over four million members who discuss stocks, shares, and where they are going to invest their money. These ordinary day-traders had very little experience in the stock market but believed if they all invested in the same company, they could make an impact. Their focus shifted to GameStop, and the joke morphed into a meme-driven movement. It gained a ton of attention; an army of people invested in Gamestop, causing hedge funds to lose billions of dollars, with some of these “investors” gaining quite a bit of money. Even billionaire entrepreneur Elon Musk got in on the action.
So, you may ask, ‘What led to this?’ Before the pandemonium, GameStop wasn’t exactly a thriving company. Back in the early 2010s, true to its name, GameStop was the prime spot for gamers to buy new and used games for a reasonable price. They were commonly known as a third-party video game retailer for consoles like Xbox and Playstation. Fast forward to 2021, and GameStop is on the verge of bankruptcy. They have become less and less popular because of the transition to digital games — many consoles now use digital codes for games rather than discs, making companies like GameStop virtually useless. The arrival of a global pandemic certainly didn’t help their cause — any remaining customers weren’t shopping in their stores.
Here is where the hedge funds come into play. They use a tactic called “Short Selling,” in which massive corporations like to ‘bet’ on the companies that won’t do well in the future. To do this, they borrow shares in a company and sell them, promising to buy them back at a later date. If the seller is sure the company will lose value, they will make a profit when they buy them back, and the price has fallen. Think of it as gambling — if your bet was wrong, and the price rises, you’d lose money. GameStop was one of the companies that many hedge funds targeted their ‘value loss’ bets on. Among hedge funds, bets like these are commonplace -- they aren’t considered risky anymore. But, r/WallStreetBets was determined to prove them wrong. Large numbers of Redditors bought shares in GameStop, which caused a sharp rise in its share price. None of the hedge funds foresaw this, but since they promised to purchase the shares back, they had to do so. The stock soared up over 500% percent within a few days, shocking the industry.
The trading app, Robinhood, has also played a substantial role in the fiasco. Many of the Redditors associated with r/WallStreetBets use Robinhood to make their investments. Robinhood is facing a plethora of lawsuits due to the restriction of several stocks, including Gamestop. They defended this move by calling it a “risk-management decision” made in the event of “extraordinary circumstances.” Their answer did anything but satisfy the app’s users-- many are accusing the company of negligence and breaching its contract with traders. However, disgruntled users aren’t the only threat to Robinhood. The company’s decision drew condemnation from many prominent figures, including House Representative Alexandria Ocasio-Cortez (D-NY) and Senator Ted Cruz (R-TX). Robinhood CEO Vlad Tenev is set to appear before the House Financial Services Committee at some point in the next week. This hearing, which will be conducted virtually, will probe the volatility in shares of GameStop. On top of that, several government entities are looking into the possibility of market manipulation in the case, which, if evident, would cause immense ramifications for Robinhood.
Though the excitement was high during the GameStop surge, the aftermath has been anything but that. Since what goes up must come down, the stock peaked and began to drop rapidly. Many GameStop investors have lost a lot of money, and some are in financial trouble.
“Sticking to the man is a good rallying cry, and it was satisfying to see hedge funds lose billions. But in the end the little guy is going to get hurt.”