There has been a lot of buzz in the stock market recently surrounding the gaming retailer GameStop, reaching from mainstream media to government and legislation.
Multiple news outlets have been reporting every small detail in real-time about the incident and it’s been quite a task to grasp the situation, so here is the breakdown of the situation and what it overall implies.
On an unexpected day in Mid-January, GameStop stock prices shot up, leading to more investors buying these stocks and holding on to them. The rapid rate at which these stocks shot attracted the attention of multiple groups/people. Those coming from mainstream media began to hyperfocus on the situation leading to an influx in the subreddit forum known as r/wallstreetbets. This led to membership of this forum increasing from 1.5 million to 8 million people that encouraged people to buy these stocks. Quickly, this situation was introduced to an even larger mainstream public demographic through social media and influential figures. Elon Musk tweeted about the situation and even joined a Discord server that came from the subreddit, bringing his following into the battle of propping up GameStop stock prices.
With the rapid attention on GameStop, it shed light on controversy within the world of stocks.
What led to the incident?
For most of 2020, GameStop stocks weren’t expected to have much value. However, this changed in late December when subredditors predicted it to have a small investment value. Slowly, a multitude of factors led to a rise within the stocks. One of the first events were the changes made to GameStop board directors. This led to the stock rising up to 50% in one day. Change of management isn’t uncommon in the world of business. However, the proceeding factors cause the story to play out even more dramatically.
When the subreddit began to pick up attraction, there became a noticeable change of goals. The subreddit forum started off with an “only for profit” mentality as many stock forums do, but now instead, their primary focus shifted to “how can we make hedge fund conglomerates lose the most amount of money.” This led to other companies such as AMC being thrown into the mix with subreddits directing the following to begin investing in their stocks as well.
The Big Picture
Deep within this seemingly chaotic situation was an underlying battle between the smaller investors and big named hedge fund conglomerates. Hedge fund conglomerates are companies that operate through buying and selling stocks after predicting their future market value through and implementing multiple business strategies to maximize profit. Though this is a brief explanation of what they do. Many participate in the practice known as “shorting.” This is when hedge funds profit out of other company failures by buying stocks from these companies and selling them to others. The profit comes from the transaction between the selling and the later drop of the value in stocks. Hedge Funds are generally also more unregulated, meaning they aren’t compelled to disclose information about the stocks they’re controlling.
Because of their nonregulation, the public views them as a centralized financial system in the U.S. that benefits only the rich. This battle between big-money hedge funds shorting the stock versus small investors trying to prop it up was viewed as something similar to a battle between the rich and poor. Many smaller investors thought that holding these stocks was a way to decentralize a financial system in the US.
And these smaller investors made a huge impact.
With the sudden skyrocket of Gamestop’s stocks, large Hedgefund companies are facing losses of up to 6.12 Billion.
Now, what’s the controversy?
With this new movement came unexpected plays from many sides.
One of the unexpected things was the collaboration between many small everyday investors banding together to treat these stocks as a means to expose the hedge fund conglomerates. Another unexpected development was the response that Apps such as Robinhood had to the situation.
Apps like Robinhood are known for introducing new, smaller investors into the world of stocks. So when they made the decision to suddenly cut off smaller investors from being able to purchase GameStop stocks in the midst of the movement, it broke its trust with its users. Many believe Robinhood betrayed the trust of the public and sided with large Hedge Fund companies instead. In spite of this, Robinhood claims the incident was due to a “technical error,” but many small investors are pursuing lawsuits against the app under the claims of “market manipulation.”
Furthermore, Congress decided to get involved and have a hearing on Feb. 18, 2021, in order to check the ethicality of these hedge fund conglomerates and their practices. However, there’s been speculation of conflict of interest. This is due to rumors of family members of congress being affiliated with these hedge fund companies and even congress members themselves being affiliated with them.
Overall, the exposure of Hedge Fund individuals and market practices to the public have increased their awareness of the complex nature of the stock market. These future Congressional hearings will show the nature behind the relationship between Congress and Wall Street itself and whether their true support lies with those on Wall Street or the public’s common interest.