David vs Goliath: Reddit’s Manipulation of the Stock Market

Jastej Singh, Staff Writer

What do you know about the stock market? If you are like most people, it is probably not a lot. However, one thing that many people do know about the market is what happened with the recent fiasco with Reddit users manipulating the market and forcing stocks like Gamestop and AMC to shoot up in value. That incident and ensuing fallout from it has people trying to learn as much as possible to profit as much as possible.

Many regular citizens saw the Gamestop and AMC situations as an opportunity but couldn’t quite get a hold of what was going on to take advantage of the situation. Richard Fisher, the former president of the Dallas Federal Reserve, told Allison Morrow of CNN Business “They have seen the rich get extremely rich by taking advantage of cheap money, and they want to get their piece as well.”

Now for the masses who don’t completely understand the situation here is a short breakdown of what transpired: stocks such as GameStop and AMC were the cheapest they had ever been and all of a sudden they skyrocketed in value. This was the doing of people from a Reddit page called r/wallstreetbets who convinced millions of users on the page to buy the GameStop stock forcing its price to increase exponentially. This increase made massive hedge funds lose billions of dollars, forcing many of them to declare bankruptcy.

 Many people view this market manipulation as a turning point in stock market history. To start, in order to truly grasp what happened, you need to understand what a “short” is in trading stocks. A “short” is essentially a way for the investor to make a profit if the value of the asset falls. Let’s say you borrow a stock from a broker and sell it immediately at its current price. You do that and then you hope the stock’s price falls so that you can buy the stock back at a lower price and return the shares you borrowed to your broker but keep the difference. For example, if you borrow a stock at $10 a share and sell it immediately at that price in the hope that the price falls, let’s say to $7 a share before you buy that stock back. You then give it back to your broker and keep the difference of $3 profit per share. Now if the price of the stock rises the opposite can happen and you can lose money. 

On January 14, 2021, a Redditor on r/wallstreetbets noticed that a hedge fund had taken a massive amount of short trades against Gamestop. This person convinced everyone on the thread to join forces and buy as much GameStop stock as possible, forcing the price to rise and forcing the hedge funds to lose billions. This worked, as their losses surpassed the 13.1 billion that the hedge fund was worth. This led to the hedge fund closing all its short positions and buying all the GameStop stock back at much higher prices. This, of course, made the price of the stock even higher. The hedge fund declared bankruptcy and the Reddit thread continued searching for other hedge funds to continue the cycle, hoping to force them into bankruptcy as well. 

On January 22, GameStop’s stock surged to a then-record high of 51% in a day. And three days later GameStop shares surged again and the fight entered another week. On the 27th and 28th, Robinhood and other brokerages imposed strict limits on GameStop trades, which brought the brokerages extreme backlash from people believing that they were siding with the hedge funds. This limitation brought unlikely agreement from people such as Republican Senator Ted Cruz and Democratic Congresswoman Alexandria Ocasio Cortez, two politicians who seem to always be on the opposite side of an argument due to their political beliefs. In this case, Ocasio-Cortez came to Twitter to speak on Robinhoods limits on retail investors calling it “unacceptable” which Cruz retweeted saying that he agreed.

This market fiasco seems like a David vs. Goliath situation where the big guy – in this case, the hedge funds – has been completely destroyed by the little guy – in this case, the regular citizen. CNN’s Christine Romans states, “The irony is delicious, An online flash mob beats Wall Street insiders at their own game.” This event caught the eye of millions of people including Elon Musk who tweeted “Gamestonk!!” on his Twitter, which shed more light on an underdog story while incorporating a popular meme.

Over the course of the past three months, GameStop’s stock has risen a total of 1,181.32% and is currently listed at $200 a share compared to a year ago where it was only $2.57. This increase even though it seems amazing right now, won’t last long, “At some point, reality will set in,” says Allison Morrow from CNN Business. Eventually, everything will go back to normal but this entire situation was a first in history and was quite amazing to see. It comes to show the power of current age social media and what people can truly do when they come together with their eyes set on a common goal.