Wall Street looses billions after Reddit group launches “short squeeze” on companies like GameStop and AMC

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Andrew Gleason ‘22

Hedge Fund investors on Wall Street lost tens of billions of dollars late January after millions of retail investors on platforms like Reddit and Discord  got together to pull off one of the greatest “short squeezes” in market history.

 

A “Short squeeze” occurs when two things happen. First, large hedge funds and wealthy investors will often bet on failing companies that the value of their stock will fall over time.  They then borrow and sell stocks high, putting them in debt, before buying them back at a lower price later on. This strategy is called “shorting” a stock. A “short squeeze” happens when a stock price rises drastically, forcing them to rush to buy the stock that they had sold. This exponentially increases the stock price. Inspired by the members of the Reddit group “WallStreetBets”, and with the help of social media, several short squeezes took place with dying companies like GameStop, AMC, and Nokia. Wall Street was hit hard with short sellers loosing 26.7 billion dollars on GameStop alone.

 

“I didn’t realize it was cult like,” Said short seller Andrew Left regarding the WallStreetBets forum. “It’s just a get-rich-quick scheme”.

 

Left was just one of several wealthy targets on Wall Street hit hard by this short squeeze. Massive hedge fund Melvin Capital came extremely close to bankruptcy after GameStop went up over 300% since the beginning of this year and had to be bailed out by fellow hedge funds. With Wall Street panicking, the free trading app Robinhood shut down trading on thirteen highly volatile  stocks.

Facing fierce backlash Robinhood released a statement saying, “In light of recent volatility, we are restricting transactions for certain securities to position closing only.”

Along with the temporary shut down of these stocks, Wall Street and some financial experts are calling for more regulation to prevent short squeezes of this magnitude from happening again.

Although a short squeeze like this may never happen again, the coverage of this event has brought in many new retail investors, young and old, who thought they would never trade themselves.

In all the movies a broker or trader is “the guy with the red Lamborghinis, with a Redbull or cocaine problem” Said 44 year old Sam Dafterian who recently started trading during the COVID market crash. Sam is just one of millions of people who are moving past the stigma of trading and using free trading apps like Robinhood and Webull. Robinhood currently has over 13 million users and rising quickly.

We are entering a new age of trading. An age where the “common man” can bankrupt Wall Street billionaires and buy whatever stock whenever they want from the tip of their fingertips.