Major Wall Street hedge funds have lost billions in recent days.
LIKE MOST OF us, you might be wondering what hell is going on with GameStop.
Why is everyone talking about the video game retailer and why is former Trump press secretary Anthony Scaramucci calling this week’s events “the French Revolution of finance”?
The answer is: something rather remarkable, which like the French Revolution, has lit a spark in one country that is beginning to spread elsewhere.
The sans-culottes of this particular revolution — which is really more of a curiosity than anything else — are the seemingly ordinary Joes who have organised online through social media platform Reddit to buy some of the most bet-against stock on US markets.
They are using apps like Robinhood and eToro, which offer easy access to stock markets and commission-free trading, and which have become increasingly popular in recent times.
These apps have provided the means for casual, hobbyist traders – as opposed to the people who do this for a living – to make a significant impression on stock markets in recent days.
The impetus from all of this comes from a subReddit page, r/WallStreetBets, where many of these hobbyists — some 3.5 million of them, in fact — share their opinions and thoughts on stock market punts.
In recent days, users began talking up GameStop and other struggling companies, which has led to a massive coordinated buying effort.
As demand for the stock has risen, so has the price of the company’s shares.
Gamestop, which recently announced the closure of 1,000 outlets; phone-maker Blackberry; and Covid-beleaguered cinema-operator AMC have all benefited from the activities of these bored, stuck-at-home traders.
GameStop’s market capitalisation — the value of the company based on its publicly traded shares — has skyrocketed nearly eight-fold since the start of the year.
AMC’s share price has more than tripled since Tuesday.
But why are they doing it? The answer, it seems, is mainly for the craic and also to wind up traditional Wall Street investors and institutions.
Remember, the companies in question are ones that normally, stock market investors wouldn’t touch with a barge pole.
Gamestop, like all traditional retailers, has seen its lunch eaten in recent times by online marketplaces and e-commerce; a trend that has only been accelerated during the pandemic. Rather than bet on their success, Wall Street traders prefer to bet against them or ‘short-sell’.
“If you believe a stock’s value will increase over time, you want to buy it and hold it, which is known as taking a ‘long’ position,” explained Karen Wallace, Director of Investor Education at US financial services firm Morningstar in an article yesterday.
But if you anticipate that a stock’s price will decrease, you could take a “short” position. To do this, you would borrow shares of the stock and sell them to another investor (even though you don’t own them).
If you can sell the stock to that new investor for a higher price than what it will cost you to purchase the shares from the original owner to cover your borrowing, you will profit from short-selling.
But the catch is that the stock price keeps rising, the short seller will have to hand back the borrowed shares at a higher price than they sold them.
Wallace explained, “Because stock prices can (in theory) rise indefinitely, short-selling can lead to potentially unlimited losses.”
This is the situation than many traditional, ‘institutional’ Wall Street investors find themselves in now. Having bet that these shares would fall in value, they are now watching from behind the couch as prices continue to rise.
This seems to be motivating much of the activity.
Noticing that many mainstream Wall Street players had shorted Gamestop by 100% — which means effectively that the funds had more bets against the company than the company has shares — casual investors banded together, motivated to some extent by a sense of revenge against some of, at they see it, the world’s most rapacious hedge funds.
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The result? Major funds have lost an estimated $5 billion in one of the biggest ‘short-squeezes’ in history. And what started almost as a meme is spreading to other countries.
Shares in French company Unibail-Rodamco-Westfield — a real estate company which owns a large portfolio of shopping centres and airports — have jumped as much as 20% in recent days.
There are other examples in Japan and Australia.
It’s worth noting that apart from some very wealthy hedge fund investors, it’s not clear if the phenomenon is hurting anyone or breaking any laws.
But naturally, the events of the past few days have managed to seriously grind some gears within the Wall Street establishment.
Adena Friedman, the chief executive of Nasdaq — who in the past, has spoken about “democratising capitalism” while in the same breath hitting out at the “dizzying patchworks” of regulation that companies face in the US, which she believes is “gumming up our markets” — yesterday said that regulators need to pay close attention to the situation.
US President Joe Biden is said to be monitoring the situation, as is his newly-minted Treasury Secretary, Janet Yellen, a former chair of the Federal Reserve.
Meanwhile, political opponents of Wall Street are luxuriating in the irony of it all.
Yesterday, Senator Alexandria Ocasio-Cortez tweeted, “it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.
“Anyways, tax the rich.”