The GameStop Frenzy–How Young Investors Forced Wall Street to Pay Attention

GameStop stock has risen from below $20 to more than $400 this month due to rabid buying by an army of investors on Reddit who challenged hedge funds who bet that the stock would fall. GameStop has struggled for years, unable to modernize and revamp its business model. So how exactly did their shares soar up to 1000% in less than two weeks? Frankly, it is the mix of the force behind finance momentum, and the introduction of a new wave of young investors into the market. Online communities on discord, Tik Tok, and Reddit have fueled a surge of young investors into the world of day-trading.

This GameStop situation is described in financial terms as a “short squeeze.” Essentially, hedge funds were betting on their belief that GameStop shares would drop in price. Therefore, they borrowed shares of GameStop, immediately selling them to other investors at the current price. Then, if their assumption was correct that the stock price would go down, they would buy back GameStop shares at this lower price, returning them to the original owner, profiting in the process. However, that was not what occurred. The subreddit r/WallStreetBets (WSB), a community of 2.9 million retail investors, rallied together to save GameStop, doing so by purchasing many shares and consequently causing its stock price to rise in the process. The hedge funds who were shorting it were now forced to buy the stock back at this higher price. They had to buy even more to avoid taking massive losses, forcing the stock price to go up even further. In hopes that the army of Reddit investors would eventually give up, many hedge funds tried to wait it out and some even continued to short shares—but the hedge funds have already lost billions. 

Chamath Palihapitiya, CEO of the venture capital firm Social Capital recognizes the power of an online collective. In an interview with CNBC Palihapitiya remarked, “Instead of having ‘idea dinners’ or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum. What it proves is this retail [investor] phenomenon is here to stay. It also proves that retail investors are smarter than Wall Street thinks.” Underestimating the power and potential that “everyday” people have was Wall Street’s first mistake. There must be a recognition of the value that these retail investors provide, especially when the market is under stress,  both in market liquidity and in their diverse trading strategies.

Many of these retail investors primarily use no-fee apps like Robinhood or Acorns, both of which aim to make investing more accessible to the average person by simplifying the trading process. During the Gamestop Saga, Robinhood limited users from buying stocks from companies like GameStop, Nokia, and AMC due to “market volatility.”  This resulted in extreme backlash from the community of r/WallStreetBets as well as members of Congress including Sen. Ted Cruz, Rep. Alexandria Ocasio-Cortez, and Rep. Rashida Tlaib. While these individuals vary immensely in their political beliefs, they all agreed on one thing: there must be a hearing on Robinhood and its stifling of free trade. AOC, seeing this ban as an unacceptable abuse of power, tweeted, “ We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” Rather than attempting to suppress retail traders’ participation in the market, there should be a focus on educating these young investors about the potential risks of day-trading, both on the personal and national level. 

There are rising concerns that young investors will be looped into cycles of obsessive trading. Kiran Boggs, a 17-year-old who posts finance-related memes, tips, and news catered for Gen Z (@generationzillionaire) provides a nuanced perspective on the matter. Boggs views the GameStop frenzy as a valuable and cautionary tale for young investors, stating that, “I’m glad this gave people an opportunity to realize how much power you can hold if you take an active interest in investing–but, I don’t want them to be risky or to manipulate the market by pumping a stock until the SEC (Securities and Exchange Commission) steps in, but this is a great reminder that investing smartly is something you should consider.”

This is a historic moment that marks a shift in the power dynamic between the “Wall Street elite” and the people. Rather than dismissing retail investors or young individuals who take part in the stock market, there should be a recognition of their potential. The spread of financial literacy and information through online forums can be a powerful tool in enacting positive change and forcing hedge funds to take accountability for their actions.  This experience has shown how that power is ultimately still in the hands of the people.

^{By: Ahlay Hussain}