Business and Economics Analyst
The GameStop phenomenon taught us the Wall Street titans will almost always come out on top
The Reddit versus Wallstreet drama that drove GameStop prices to inconceivable heights last month might first seem like a modern-day David and Goliath story where the little guys gave Wall Street a run for their money, but ultimately just proved how large hedge funds will seem to win every single time.
For those unacquainted, GameStop, a brick-and-mortar videogame retail chain that saw its finances dwindle both due to game producers releasing products digitally as well as the impacts of COVID-19 on its stores became the number one target for hedge fund short sellers. Short selling is essentially betting on a company to fail, borrowing the company’s stocks from a broker to sell it, then re-buying once the price had crashed to return and make a profit. The Redditors from a popular financial subreddit, r/wallstreetbets, got wind of this, and decided en masse to all buy GameStop shares in what could only be described as a nihilistically induced frenzy — or as they call it- YOLOing. Reddit plan worked; GME rose from under $40/share to shy of $350/share within a week, causing huge losses to those who were shorting the stocks.
Melvin Capital, the main short seller in the saga and the Public Enemy Number One under the eyes of Redditors came out of the race with huge losses. The hedge fund entered 2021 with $12.5 billion in managed assets but ended up with only $8 billion at the end of January, even with a massive $2.75 billion injection from other hedge funds. Melvin capital ended up losing 53% of its asset when closing its positions on GameStop on January 27th. Some Redditors, consequently, benefitted and was able to afford their pet’s healthcare or even paid off the entirety of their student loan. Redditor Keith Gills became a multi-millionaire after seeing his $50 000 in GME stock turn into over $44 million at its height.
However, Robinhood and similar stock brokers restricted trading on GameStop stocks and caused its price to fall rapidly.
The hugely unpopular move to restrict trade was explained away by Robinhood’s managements as simply to help keep the company’s finances under control, but with having Citadel, a large hedge funds whose billions helped to bail Melvin Capital out earlier in the week, as one of their main business partners, the move couldn’t help but be seen as blatant collusion between hedge funds and brokers. The restrictions, while landing Robinhood in hot water between a class-action lawsuit and a congressional hearing, also managed to prevent the public from buying GME and drive up the price. What started as a revolt against the financial institutions of Wall Street turned into just another opportunity for massive hedge funds to cash out. Everyone knows the exorbitant price of GameStop is unsustainable, a failing company’s stock cannot be worth $350/share. The winner of the GameStop buying frenzy is neither the Redditors nor Melvin Capital, but the various hedge funds that take short positions when GME was at its highest on January 27th. GME fell 86.4% from $347.51 down to $53.50 in a week and with buying restrictions from brokers like Robinhood, prices seem unlikely to go up. This was a massive loss to the personal finances of thousands of Redditors who invested in the stock, all the while being a golden opportunity for hedge funds’ short-sellers.
What the GameStop phenomenon taught us was the Wall Street titans, with their colossal capitals, access to information and research groups as well as deep ties with both politicians and private companies, will almost always come out on top and maintain the status quo. Robinhood restricting trades and Discord’s r/wallstreetbets server ban demonstrates the extent of the financial institutions’ power. Regular people, with limited buying capacity, could only go along for the ride and hope to turn a small profit. This is not to say, however, that the people, don’t hold any tangible power. The mass buying of GME by Redditors still strike a blow into the pocket of Melvin Capitals, and from now on, hedge funds would have to think twice before taking a short position again.