If you happened to be on the Internet at all last week, you might have seen that Reddit users outsmarted a multi-billion dollar hedge fund.
What the?
Without going too much into the nitty-gritty financial details, a hedge fund named Melvin Capital was short-selling GameStop’s stock, called GME.
Normally when you buy a stock, if a company does well and its stock price increases, you can sell your share and the difference is yours in profit. Short selling essentially operates in the opposite way. When you short sell a stock, if the company does poorly and its stock price decreases, you can buy back the stock at a lower price and the difference is yours in profit. The risky nature of short selling is if a company starts doing well and its stock price increases, you sometimes lose a lot of money.
A few weeks ago, Reddit users on the subreddit r/wallstreetbets noticed Melvin Capital was massively short-selling GME. Millions of Redditors banded together to buy GME and the stock price increased more than 1000% so far this year. Hedge fund Melvin Capital lost tens of billions of dollars meanwhile Reddit users, and anyone else riding the high of the market, made some serious money.
But this isn’t the end of this story.
In the midst of the market volatility, a public investing app called Robinhood artificially halted trading on GME and 50 other volatile stocks.
Millions of furious small-time traders that invested in GME this past week through the Robinhood app are pointing to one of the app’s first tweets in 2016 “Let the People Trade” as the epitome of irony. An app that was supposed to “democratize investing for the common person” temporarily restricted additional trading on GME and other stocks that were being “short-squeezed,” on Jan. 28.
Why would Robinhood do that?
Some are raising questions about the role of the capital firm Citadel, which owns the hedge fund Melvin Capital, and is also responsible for “more than 35% of the [Robinhood’s] trading revenues.” Then Robinhood users, justifiably outraged, expressed their anger by leaving negative reviews on the Google Play Store. By the end of Jan. 28, Robinhood’s app store rating was reduced to just 1-star, but that didn’t stop tech giant Google from deleting over 100,000 reviews, bringing Robinhood’s overall rating back to 4-stars.
While tech titan Google was able to censor the people, they weren’t able to stop this giant message from being flown over Robinhood’s HQ in San Francisco on Jan. 29.
In summary, Melvin Capital, who is owned by Citadel, massively short sold a bunch of companies. Then when regular people decided to invest in these companies to screw over the hedge funds, the investing app Robinhood, which is largely funded by Citadel, temporarily restricted trading. On top of all that, Melvin Capital ran with its tail between its legs to the media to complain that the Reddit users were manipulating the stock price unfairly. NASDAQ president and CEO Adena Friedman suggested that “additional regulations may be necessary to prevent retail investors from coordinating on social media.”
What this debacle shows is that Wall Street wasn’t designed for you or me. It, and to an extent our entire country, was bought and paid for a long time ago. When hedge funds decide to short sell companies into the ground, that’s just the ‘free market’ at play, but when average Americans attempt to tip the scales in their favor, the wealthy elites cry out and label them ‘stock manipulators’ and want to change the rules. While the 2011 Occupy Wall Street movement failed to enact any serious change, this week’s slap in the face to Wall Street could be the start of a larger conversation about the rampant economic inequality in the United States.