Stock frenzy stuns nation
In late January, the world witnessed a stunning new example of the power of the world wide web. Reddit.com users banded together to send GameStop stock prices soaring, a totally new phenomenon that Wall Street traders had never seen anything like before. There have been past instances of societal frustrations with Wall Street banking and trading firms leading to uprisings, however. In September 2011, nearly 100,000 people gathered on Wall Street in New York to protest corporate greed, income inequality, and the financial crisis, in an event known as “Occupy Wall Street.” This year, Occupy Wall Street went digital.
In the weeks leading up to January 25, online members of a Reddit forum named “WallStreetBets” noticed that hedge funds (investment groups that engage in complex trading) were making large amounts of “short sell” purchases of GameStop stock. Short selling is the practice of borrowing shares of a stock, selling them (expecting the price to drop) and buying them again later at a (hopefully) lower price to sell them back and come out ahead. Noticing that all of these short sells were coming due, the 8 million members of WallStreetBets made a simple plan: buy as much GameStop stock as possible, causing the price to go up and forcing the hedge funds to buy the stock back on the due date of the original borrow at a far higher price and lose massive amounts of money in the short selling process.
The price of GameStop stock rose nearly 500% in just a few days. For the Reddit users, the plan was successful. The wealthy hedge funds lost huge amounts of money. One group, Melvin Capital, lost over 50%. Although the price has since fallen back to under $70, the impact of the “short squeeze,” as it is called, continues. For some individuals, the occurrence was incredibly impactful. Those who sold at or near the peak were highly successful, and some told stories of being able to pay off student loans, afford a new place to live, or other significant positive impacts on their lives. For others who struggled financially during the recession in 2009, the chance to “stick it to big money” was a moment of sweet revenge. Some, however, got caught up in the hype and were unsuccessful. Many individuals who bought into GameStop at or near the peak would end up losing big, as the price has since fallen over 80%. Other controversies surrounded the events, such as stock trading app RobinHood blocking purchases of GameStop during the peak of the squeeze. The Securities Exchange Commision has vowed to investigate to see if RobinHood violated market rules during the course of the events. Regardless, the internet-powered market phenomenon will remain a major event in market history for decades to come.