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Can Reddit Forums Take Down Hedge Funds? Why GameStop Stock Soared

Huffpost Canada | | Mel Woods | Jan 29, 2021

GameStop retail investors making headlines - Can Reddit Forums Take Down Hedge Funds?  Why GameStop Stock Soared

The meme stocks came for Wall Street, and hedge funds lost billions of dollars.

A David and Goliath fight is being waged in the stock prices of seemingly failing businesses like GameStop and BlackBerry.

In this case, Goliath is a group of Wall Street hedge fund investors and David is an online community of individual investors who frequent Reddit and TikTok looking to stick it to the man.

Stocks for previously floundering companies like video game retailer GameStop, movie theatre company AMC and original smartphone company BlackBerry have skyrocketed exponentially this week after being bought up en masse, largely by users of the Reddit forum r/WallStreetBets. This has thrown the stock market into chaos, hedge funds are pulling out their investments and really, GameStop hasn’t received this kind of attention since the Nintendo Wii came out.

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According to his spokespeople, even U.S. President Joe Biden is monitoring the “GameStop situation” — a funny phrase for the U.S. president to say — closely.

But what is actually going on with the stock market and how did a ragtag bunch of meme-lovers on the Internet cause so much drama? Many people, including myself, might meet most stock market news with confusion, ignorance or an ironic declaration of “STONKS.” But stocks do have an impact on our day-to-day lives, and we’re seeing that in real time right now — all thanks to Reddit.

Here’s what you need to know.

What is r/WallStreetBets?

It’s a Reddit forum where small-scale investors gather and speculate on stocks. The group describes themselves as “Like 4chan found a Bloomberg Terminal”  and currently boasts over 4.2 million users. They also had an accompanying server on voice-messaging service Discord, which for a while this week sounded like the honest-to-goodness stock market.

The Reddit forum briefly went private Wednesday night following this week’s mayhem, and the Discord server has been shut down due to an influx of inappropriate speech, according to its owners.

Why GameStop?

GameStop (GME) has been identified by hedge fund investors as a good short opportunity, as a stock in decline with no sign of rising anytime soon. The once-thriving retail video game brand has been hit hard by the rise of online gaming. The company’s brick and mortar stores have struggled even further in the pandemic.

A few months ago, Reddit users, upon seeing this hedge fund interest, decided it was the perfect company to buy stocks en masse and gut the hedge funds who had been short-selling it. It also was a “memey” stock in the sense that a video game store was the perfect place for a bunch of online investors to put their money.

Led by users including an influencer who goes by the username DeepF**kingValue, the Redditors bought shares and refused to sell, just as hedge funds started to see the prices increase and rushed to cover their short stocks.

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GameStop’s share price skyrocketed. At the start of the 2021, GameStop was trading for less than $20 a share — on Wednesday it hit nearly $400. Users on the forum are still encouraging each other to hold onto their stocks and not sell, in order to keep the price going.

But GameStop’s not the only one. The Redditors have identified other companies targeted by shorting hedge funds, from BlackBerry (BB) to the AMC Movie Theatre chain, and bought those too, leading to their own inflated prices.

On Thursday, trading app Robinhood restricted trading on certain shares, including GameStop and BlackBerry. Robinhood said trading in the affected shares will be limited to traders looking to close out their positions. That means shareholders can sell and shorts can buy them to cover their positions, but any other type of trading is currently restricted.

On the Reddit forum Thursday, users are encouraging each other to use other means to buy, and to

“hold the line.”

“To everyone who is nervous: Wall Street is worried. Some of these people are losing A LOT of money because of us. These are people that never cared for those of us struggling. These are people that have 4 homes valued in the millions of dollars. They drive Lambos,” user tsnuamighost wrote Thursday morning.

 

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NY Intelligencer | Eric Levitz | Jan 28, 2021

Free market is a lie cartoon - Can Reddit Forums Take Down Hedge Funds?  Why GameStop Stock Soared

Robinhood's Trading GameStop Ban Proves the Free Market Is a Lie

Robinhood is a stock-trading app that exists to “democratize finance” — but will also, on occasion, prohibit you from buying stocks because democratically unaccountable experts have declared them overpriced.

This was the befuddling message that Robinhood sent to its readers Thursday morning, as the most befuddling stock craze in modern memory pushed the price of a GameStop share above $440.

As of this writing, the GameStop rally appears to be fading. But the questions the phenomenon has raised — about the ethics of gamified stock-trading apps, the inequalities between large and small investors, how share prices are actually determined, and what the stock market is for — seem to grow more numerous and vexing by the hour.

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Fortunately, Chris Arnade may have some answers. The former bond trader spent two decades on Wall Street before growing disillusioned with his profession’s culture of cynicism and greed. In recent years, he’s invested the bulk of his time into photography and writing, typically about social class and poverty in the U.S. But he’s hedged these productive activities with no small amount of leisurely lurking on Reddit. Which makes his brain all the more fit for picking.

Intelligencer spoke with Arnade Thursday about how Robinhood’s banning of GameStop spotlights the fraudulence of the “free market,” why Reddit’s GameStop bulls would be hailed as geniuses on Wall Street (if they only had the proper credentials), and what “the trickle-down corruption of the rich” is doing to American culture, among other things.

You wrote on Twitter Wednesday, “The Reddit horde through collective action is doing to hedge funds what hedge funds do to normal investors all the time.” What do you mean by that?

Hedge funds can operate in a few different ways. But a classic one is to take a position and then “talk your book.” So, you go to Davos, go to dinner at investment conferences, and use all the knowledge you gather from these conversations with government officials and other investors to put on a trade. And you execute that trade in a way that gets you the most bang for your buck by exploiting complex financial products and what we call “technicalities” in the market: the way other people are positioned, the holdings people have. Then you go on CNBC, send out morning newsletters, send out direct messages via Bloomberg to your friends, and sell everyone on your trade.

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That’s applauded behavior on Wall Street. You’re outsmarting the room, and you’re telling people that you’re outsmarting the room. In many ways, that’s what happened on Reddit over the course of the last six months. But it wasn’t done by one firm; it was done by 2.3 million self-described degenerates.

And they really did both: They took a position, and they talked their book! Somebody actually laid out a pretty good presentation on why GameStop was undervalued, a presentation that would have gone down pretty well in hedge-fund circles a while back. And then they built on that and they all piled in. They did it in a very clever way to take advantage of the positioning of Wall Street.

Is it possible to briefly summarize what made their trade clever (in a way that a lay reader would understand)?

They did it through “call options.”

Which is when you buy the right to purchase a stock at a set price within a specific time period. So let’s say GameStop was trading at $20 a share. The Redditors would buy a call option that gives them the right to buy a GameStop share for $50 at some point in the near future.

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And you can buy that very cheap because no one thinks the price of a GameStop share is ever going above $50. The broker dealers will sell the call options at a low price because they think it’s a low-probability event. But the Redditors know it is not a low probability event because they are going to push up the stock.

I suspect I know your answer but: Was it wrong for Robinhood to prohibit its users from buying GameStop shares (ostensibly to prevent its amateur user base from losing lots of money by buying near the peak of a bubble)? 

Yeah. I think it was. Look, I don’t think this is all going to end well. I think when the dust clears, you’ll probably see that there wasn’t a net transfer of wealth from Wall Street to retail investors but a transfer of wealth from Wall Street to Wall Street, from some firms to other firms. But you’ve got two choices here in my mind. The first, which I would prefer, is to

Regulate all of Wall Street, so that the intellectual grifting that’s legitimized by the credentialed class is taken down a notch and the Redditors get regulated too. Or you can deregulate and let the Reddit crowd do what it’s doing: admit that they’re a new player, and as legitimate as you. It’s the hypocrisy that’s frustrating.

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