Traders of the World, Unite: Reddit, GameStop, and What Comes Next

The “short sell” is a somewhat common practice on Wall Street. It’s a technique in which an investor will borrow a stock and instantly sell it at the market price, in the hopes that when the stock is due to be returned, it will have declined in value. At that point, the borrower buys the stock for the reduced price, and the transaction is completed. The difference between the market price at the time the stock was borrowed, and the lower price at the time it was returned, is the investor’s profit.

Of course, this technique involves betting on companies to fail, and encouraging divestment from the stocks being shorted. Hedge funders recently attempted such a scheme with GameStop, a struggling brick and mortar video game retailer, but were thwarted when a motley crew of Reddit users decided to defy the short sellers by banding together and collectively inflating the value of the stock.

Because there is technically no limit to how much a stock’s value can increase, the potential losses incurred from attempting to short-sell are infinite. The larger the stock grows in value, the more the short-sellers lose. In this case, they’ve lost billions.

For many years, retail investors have speculated on what might happen if they all banded together and bought the same heavily shorted stocks, at the same exact time. But it wasn’t until the pandemic created a perfect storm of millions of new, young, social media savvy investors with lots of time on their hands, that it became an actionable plan. “Operation GameStop,” if you will, was a proof of concept. The tactic was then applied to other heavily shorted stocks like Bed Bath and Beyond, Blackberry, Nokia, and AMC.

But it wasn’t long before the empire struck back.

First, on Wednesday afternoon, TD Ameritrade raised its margin requirements for trading several stocks, including Gamestop and AMC. Then the next morning, Robin Hood went a step further, banning the trade of those specific stocks on their platform. Subsequently, Robin Hood began removing any stock targeted by the unruly mobs, as soon as it began to gain momentum.

Meanwhile, the financial press has been losing its mind, apparently terribly concerned about stock manipulation, now that isn’t respectable billionaires, but the hoi polloi, doing the manipulating. It didn’t take long for the notoriously anti-regulation denizens of Wall Street to begin calling for new regulations, specifically aimed at shutting down the retail investors who are targeting short sellers. Even newly appointed Treasury Secretary Janet Yellen took notice, offering words of condolence and promises of regulatory scrutiny to the now butt hurt fat cats who make up her core constituency.

Reddit was also not immune from the wrath of the Wall Streets titan’s, with Wall Street Bets, the forum that started it all, going private in fear of attracting anymore attention from the people who really run things around here.

And if half of that was Greek to you, don’t worry, we’ve got you covered. Russell Dobular, aka “The Socialist Day Trader,” and Keaton Weiss are here to break it all down on episode 104 of the Due Dissidence podcast. Click the player below to hear the full conversation:

Subscribe to the Due Dissidence podcast on Apple, StitcherSpotifyCastbox, Google Podcasts, or any major podcast player!

Photo: Philip Pessar

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