January 28, 2022

Redditors crashing hedge funds – Wait, what?

So, if you have not been living under a rock for the last week or so, you might have heard about the stock price of US-based retailer GameStop going absolutely through the roof and short selling. Before we go into this in more detail, I should probably explain shorting in a relatively simple way. So, here goes. If a large-scale investor like a hedge fund believes that the value of a stock is going to reduce, they borrow a stock, sell the stock at the higher price, and then when the price reduces, they buy it up at that lower price to return the stock to the lender, pocketing the difference. 

For example, if I believed that the price of a Tesco stock, for instance, was to reduce from 240p, if I were shorting the stock, I would borrow 30 Tesco stocks, sell them at the current price of 240p, and then wait for it to reduce, in this instance to say 200p. I would, if I were short selling, then buy up that stock at 200p, and then return the stock to the lender, pocketing the 40p difference per stock, a total profit of £120, a pretty healthy profit. However, if my bet is wrong, and the stock price of Tesco stock actually leaps to 400p, then I lose 160p on each stock (£480 in total). 

So, over the past year with the Coronavirus outbreak, GameStop as a physical retailer has been struggling, and thus the vultures have descended. Hedge funds opened short positions on GameStop stock en masse, and the Redditors noticed it. They, therefore, bought up huge amounts of GameStop stock, thereby jacking up the share price way above what would otherwise be a sensible market price, and in many cases making vast amounts of money out of this, while hedge funds have lost billions of dollars closing the shorts that they made.  

This resulted in the popular trading app, Robinhood, prohibiting the purchase of GameStop stock, and thus being accused of market manipulation to try and reduce GameStop’s stock price, in order to limit Hedge Fund losses. Hedge Fund Melvin Capital has also had to take a 2.75-Billion-dollar bailout from various financial backers, indicating the massive losses made. Current estimates put the losses incurred by the hedge funds at $19 Billion. For context, because that is such an insanely large amount of money, https://mkorostoff.github.io/1-pixel-wealth/ is a really good demonstrator of that kind of scale. 

I think, though, that there is something more profound to this than a bunch of forum posters bankrupting hedge funds. It is shown that the stock market is nothing but a casino in which the product of the common worker’s labour is pushed about by insanely wealthy fat cats, who will leverage their vast power in order to stop the common person from getting in on it. It has become clear to me from this that, even though this is on the other side of the pond, something has to change. The fat cats who trade the stocks, who own the means of trading them, and who pocket the profits of the common worker’s labour, have started to become a second aristocracy. The pressure put on Robinhood by these people to shut down the short squeeze is indicative of this, but the short squeeze showed that we have a method of getting back at them, it’s shown that, if we work together, we can bring them to their knees, and that something, therefore, has to change. 

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January 2022