By Julius Aposta
I’m going to start this article off in a way completely different from most Binghamton Review articles: with a disclaimer. I am, by no means, a financial or legal expert; if at some point I seem to be questioning the legality of specific tactics or strategies employed by certain groups, take this speculation with a grain of salt. Nonetheless, I do want to talk about something I am passionate about: trading stocks. When I first got the Robinhood app, I seldom took notice of the GME (GameStop) ticker, having observed it as continuously in a downward flux. I never truly noticed it until that fateful day, when, on January 28th, GME reached an all time high of $483 dollars per share. This was insane; never before have I ever witnessed such a dramatic sway in price in such a short time. What exactly was going on with GME? What did Reddit and hedge funds have to do with this? And what was the response from Robinhood?
To begin this tale, we should start by talking about GameStop as a company. To put it mildly, GameStop was not in the most financially advantageous position going into 2020; with an increasingly shrinking market in gaming thanks to the competition of online platforms and a series of poor returns of investors (if any, at times, as GameStop would eliminate quarterly dividends in 2019) meant that GameStop as a company was on a downward spiral. Compound this withGameStop closing nearly 783 stores in the past two years along with the ongoing pandemic and we have a business with a near hopeless strategy of staying afloat. Cue the typical investors: many rightfully suspected that the GameStop stock was overvalued given the poor performance of the company, and decided would not invest directly into GME. However, there are other ways for investors to profit off of GameStop; one means of capitalizing from the inadequate performance of a company is through the practice of short selling, where the person borrows a stock, sells the stock, then waits for the stock to fall to a certain price and then officially purchases the stock, pocketing the difference. A jerk move? Perhaps; short selling essentially banks on a company failing, and when you have a large portion of your company’s stocks being shorted, it makes financial recovery all the more challenging. A consequence of shorting a stock, however, is that if the stock’s price rises, you could face unlimited loss.
Pouring gasoline into this dumpster-fire was the fact that many large investment firms, called hedge funds, had actually gone out of their way to continuously short-sell GME. To the perspective of many casual investors, it seemed that many of these hedge funds profited off the misery of GameStop, keeping it from financial recovery while pocketing gains. Some of these hedge funds, such as Melvin Capital, had continuously bet against it, to the point that there were more GameStop stocks being shorted then there were on the market by a margin of 140%. Is this illegal? Yes: this practice, called naked shorting, is illegal, according to the Securities and Exchange Commission. Many online observers had noticed this, including a well-known Reddit forum called r/WallStreetBets. They also noticed that some, such as Melvin Capital, could stand to lose quite a bit of money if, say, the price rises unexpectedly in a short period of time. Combine this with the hopeful expectations of Ryan Cohen, former CEO of Chewy, entering as a major shareholder and publicly promising to restructure the company in a more favorable way for investors. This was the fountainhead for Reddit users on the forum to start heavily investing in GME, essentially rocketing the price sky high to get back at the hedge funds that short sold the stock. Is it legal for redditors to coordinate this? Questionably yes, although it certainly woke America up to what was going on in the financial world.
Naturally, in order to prevent further losses on their part, many hedge funds had to buy their shorted shares in the company, lifting the price even further. Melvin Capital, having continuously bet against the company, suffered such extreme financial losses from the short squeeze that it required a $3 billion infusion from Citadel and Point 72. Conveniently, Citadel provides a significant amount of investment into Robinhood, the popular trading app that many redditors utilize for their trading needs. So, imagine how convenient it was when, all of a sudden, GME (in addition to a few other stocks) could no longer be purchased, but those already owned could be sold back into the market. Out of all the questionable acts to transpire, this is likely to ACTUALLY be illegal; over 90 lawsuits have already been filed against Robinhood for their role in this fiasco. Of course, it is worth noting the irony in their slogan, “democratize finance for all”, when they essentially closed the market to their audience.
We will have to wait and see how this transpires in the coming months, but it would be an understatement to call this brief moment historic. The fact the entire US economy nearly crashed from this episode is evident enough of the mypotic view that many acting parties have regarding the situation. This isn’t an excuse for the actions of some of these hedge funds, of course. Legal action should befall those that break financial laws. However, it’s almost certain that we will see GME fall from its current price of $260; the price is simply too overvalued for what the company is worth (sorry gamers). Plus, many of these hedge funds, such as Melvin Capital, have already seen a return to financial stability, essentially rendering the scheme failed. If there is one thing that this has genuinely helped Americans with, its being able to understand the importance of the stock market in our general lives.