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Reddit vs Wall Street: Meme Stocks and Market Manipulation Kick off 2021

Here’s how the GameStop saga began and what could happen next…

The Reddit campaign that fuelled Wall Street chaos

On January 13, a Reddit forum called WallStreetBets began boosting GameStop stocks. The campaign, led by Redditors, aimed to champion the cause of retail investors and teach Wall Street a lesson by pushing up shares that short sellers had bet against. Short sellers typically borrow and sell shares in a company that are expected to fall in value so that they can buy back the shares at a lower value and pocket the difference – essentially making money on the fall of unpopular stocks. This campaign however, aimed to drive up the price of commonly shorted stocks causing losses to big name hedge funds and investors who would then have to buy back their stocks at a much higher price than sold. Stocks targeted included: GameStop, AMC, Blackberry and Nokia as well as alternative assets such as Silver.

GameStop tax season sale kicks off with a members-only Pro ...

Momentum behind the idea of a revolution against institutional investors quickly took off and on the very same day (January 13), GameStop’s share price jumped 57%. Another 24 hours later and it had doubled. As of February 3, shares in GameStop had reached peaks of 2,700% and was even dubbed by Tesla boss Elon Musk as “GameStonks”, a play on the popular meme. Faced with swiftly dwindling profits, funds began to exit their short positions, with Reddit’s favoured target Melvin Capital reporting a 53% loss in January.

Trading platforms reign in the chaos and take back control

With an influx of retail investors turning to online trading apps to buy their shares, services began to falter in late January. On January 28, trading platforms started to limit user ability to buy shares in popular targets of the Reddit campaign, including GameStop and AMC, causing public outcry. Many users of Robinhood and other trading platforms that decided to restrict user trading felt slighted by their actions. The WallStreetBets Twitter account said the freeze harmed small traders and favoured Wall Street establishment, who were still permitted to trade freely. And on January 28, a lawsuit was filed in New York, accusing Robinhood of rigging the market against its customers to help large financial firms that had bet against GameStop and did not want to see its price go up any further. It claims that Robinhood’s actions deprived ordinary investors of gains they could have made by buying when the share price was low and selling when it increased during the Reddit boost. Robinhood denies all claims.

But the move has seen an abundance of support. Cameron and Tyler Winklevoss, known for their involvement in the early Facebook, posted tweets criticising the actions of hedge funds. Elon Musk called short-selling a “scam”. Even Congress chimed in, with US Congresswoman Alexandria Ocasio-Cortez calling for a probe into popular online trading company Robinhood and Senator Ted Cruz backing the notion. New York Attorney General, Letitia James is reviewing the matter.

A conspiracy against retail investors?

With frustrations rising, rumours about how and why trading had been restricted during the GameStop pump began to circulate social media websites. Some social media accounts pointed to Ken Griffin, who allegedly pressured Robinhood to suspend trading to benefit his own company, Citadel Securities, which executes trades for the company. Popular suspicion only increased, when another company in the Citadel Group pumped $2.75bn into Melvin Capital, a hedge fund that suffered great losses by betting against GameStop. But aside from this, there is no evidence to suggest that Citadel had any influence over Robinhood’s actions and Griffin vehemently denies any involvement in the restrictions imposed.

But to the dismay of angered investors and internet sleuths, the truth could be far simpler than the conspiracy theories posed online. In a blog post, Robinhood said the restrictions were necessary in order to cover potential losses affiliated with the increased activity of its customers. In short, Robinhood didn’t shut trades down to protect the big cats, but because it simply didn’t have enough cash to meet its regulatory requirements. Robinhood boss Vlad Tenev said US regulators had asked the company to meet $3bn in collateral on the day of the GameStop pump, but Robinhood was only able to raise $2bn in venture capital. While regulators did reduce this demand to $1.4bn, Robinhood later cleared a further $3.4bn in funding from its investors in the following days to satisfy the request and “invest in record customer growth”. 

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Changing the landscape of the investment market

On January 29, the US Securities and Exchange Commission said that it was “closely monitoring” instances of extreme market volatility and working to ensure regulated bodies such as Robinhood are upholding obligations to users after complaints flooded in from users who were shut out from the market during the GameStop saga. 

Meanwhile, US Treasury Secretary Janet Yellen met with financial regulators to discuss market volatility and the grey areas of potential market manipulation fuelled by social-media inspired ‘activists’. Secretary Yellen expressed the importance of upholding the integrity of these markets and their duty to ensure investor protection. As part of its investigation, the SEC is looking at posts from Reddit and other social media platforms for indicators of fraud.

Meme stocks are more than just a situational phenomenon. The short squeeze that sent the stocks of struggling businesses into unprecedented volatility may permanently alter risk management, lead to a new wave of regulatory security and burst what could be seen as a market bubble. But the GameStop saga is far more mundane. It is likely that the suspension was merely a risk-management decision and was not part of a conspiracy to protect hedge funds.

By Amani-Cane Elouazani

Law and Finance Contributor 

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