What started off as a series of investments into GameStop stock has now turned into a war between some users on Reddit and Wall Street, with even lawmakers starting to take notice.
When discussing the situation on CNBC Jim Cramer, host of CNBC’s “Mad Money,” said that, “We are seeing a phenomenon that I have never seen and that is a phenomenon of… the WallStreetBets people. And they have ganged up… to center on a few stocks.”
Over the past few years, the video game retailer, GameStop, has seen a decline in business as the gaming industry shifts from the brick-and-mortar retail and toward digital sales. Users of the subreddit r/WallStreetBets believed Wall Street was hasty in their judgement of GameStop and began to invest in the dying company. Recently, they noticed an opportunity to abuse the situation.
By investing and inflating stock, they put short sellers into a situation known as a short squeeze. Short sellers are those who bet that the stock price would fall in order to profit but when the stock price increased instead, they may choose to buy the stock at a higher price to cut back on losses – an action which inevitably adds to the inflation of the stock price.
As a result of the rampant investments, the price of GameStop’s stocks grew from $17.25 per share on Jan. 4 to $325 per share on Jan. 29. They shot as high as $483 on Jan. 28. The efforts of r/WallStreetBets are not limited to just GameStop either as they have also tackled the struggling companies AMC and BlackBerry.
While things were continually rising, they met a block when the free trading app Robinhood restricted trading in the stock due to “market volatility,” a move that affected many participators ability to open new positions.
Vlad Tenev, CEO of Robinhood told CNBC’s Andrew Ross Sorkin that “in order to protect the firm and protect our customers we had to limit buying in these stocks.”
Robinhood’s decision then led to a customer of theirs filing a class-action lawsuit that alleges that “Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”
U.S Representative Alexandria Ocasio-Cortez criticized Robinhood’s decision on Twitter and said, “We now need to know more about [their] decision to block retail investors from purchasing stock while hedge funds are freely able to trade as they see fit.” Cortez held that she would “support a hearing if necessary.”
She continued with the idea that “Inquiries into freezes should not be limited solely to Robinhood.”
Sen. Ted Cruz commented on her tweet and that said that he “fully agree[s].”
Robinhood has since reopened trading on Jan. 29 and is allowing “limited buys of these securities.” They intend to “continue to monitor the situation and may make adjustments as needed.”
The entire situation has led to an investigation by the Securities and Exchange Commission at the request of Sen. Elizabeth Warren.
In a letter to SEC Chairwoman Allison Lee, Warren said that, “I am writing to seek information on how the SEC intends to address these concerns and prevent these and future incidents of potential market manipulation.”
As for r/WallStreetBets they are currently promoting their position with various memes and advertising stunts. They are currently encouraging others to “hold the line” in order to keep stocks high and incur further losses to short sellers.