How Reddit is Actively Screwing Wall Street
How Reddit is doing this, and why it signals a shift in the perception of investors
The two biggest stories of the week are as follows: fallout from the recent FBI raid on Donald Trumps Mar-A-Lago residence, and Liz Cheney (R-WO) losing in her primary election to Harriet Hageman. However, here at The World We Live In with Kenny McMillen, we like to go beneath the headlines and look at some of the other topics that are in the news.
I also just hate writing about the same thing twice in a week.
I then proceeded to look at economic news and came upon this nugget. Meme stock traders are back, and single-handedly screwed over everybody trying to short Bed Bath & Beyond.
This isn’t the first time that meme stock traders decided to screw over the short sellers. Last January several hedge funds began to “short sell” GameStop, the popular company that sells video game related items. Short selling is the practice of borrowing a share of a stock from somebody and immediately selling it. When it comes time to return the share they borrowed, they buy back a share of the company and return the share to the person they borrowed it from, pocketing the difference. They bet that a stock will fall in price over the course of the time they borrow the share. For example, if I think a stock will fall in price, I borrow a share from a friend, sell it for say, 200 bucks. I then buy it back a month later when I need to return it, buying it for 50 bucks. I then give the share back and pocket a $150 profit.
Hedge funds do this type of transaction on a larger level. If you don’t know what a hedge fund is, here is the definition of one from the SEC:
Hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than, for example, mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds.1
Hedge funds aren’t invested in by the general populace however, with the SEC also saying “You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds.”2. This means that most middle and lower class Americans are cut off from these, leaving only the upper class.
The GameStop situation happened like this (in short): someone on a Reddit forum called r/wallstreetbets named (warning f-bomb inbound) u/DeepFuckingValue has been promoting the stock since 2019, believing it to be undervalued. He would constantly post about the stock, tracking its price over time and other related news. Once hedge funds began to short sell GameStop, users from r/wallstreetbets noticed and decided to buy tons of shares of GameStop, creating a short squeeze. A short squeeze is when the stock price rises while people are trying to short it, causing them to lose money. Like my example before, I sell the stock for $200, and when I have to return it I buy it for $300, I lose $100. This led to hedge funds trying to short the stock even more, and memers trying to buy more stock, especially after Elon Musk sent out a tweet promoting the short squeezing. There is a lot more to the situation, but this is all you need to learn, however here is the Wikipedia page if you are interested.
The meme trading is still out there today, with the subreddit pulling another meme stock stunt in Bed Bath & Beyond (BBBY). According to The Daily Wire:
The stock price of Bed Bath & Beyond increased from $4.96 to $19.49 between July 18 and August 16, reflecting a nearly 300% increase in less than a month. Shares rose over 21% on Tuesday alone.3
This is not good for people trying to short sell BBBY, as that type of reflection will cause short sellers to buy the stock back at 300% more in order to return the stock to the person they borrowed it from. This comes as several hedge funds and investment firms are still reeling from the loss they suffered after the “Gamestonk” situation last year, and increased public scrutiny after allegations and revelations about the practices they involve themselves in. One of the more well known of these allegations is allegations of meddling and market manipulation after Robinhood, an app that allows people to trade on the stock market themselves, prevented all transactions except selling of shares on GameStop and AMC in the height of the short squeeze by r/wallstreetbets and friends.
This all is a sign of a shift in the perception of big time investors on Wall Street. Even after public outrage against Wall Street investors after the Great Recession of 2008, most people tended to ignore Wall Street investors. But now, many everyday Americans who don’t make millions in the stock market or hold political power are taking notice and fighting back, notably in places like r/wallstreetbets, which numbers at over 12.4 million total members4. The Federal Government is taking notice, with Elizabeth Warren (D-MA) saying this in a letter to the SEC:
"The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders,"5
Warren continued on to say, “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price”, and encouraged the SEC to “do their job”6. The Senate Banking Committee launched an investigation, but so far nothing has changed.
This shift into noticing what large scale investors on Wall Street poses a new era of the stock market. With people online communicating about news in the stock market and discussing things like short sells conducted by hedge funds. With the online community actively fighting what they see as unjust market manipulation that hurts businesses, it poses a threat to a large portion of income generated by hedge funds, and to short selling as a whole. Stock market transactions have seen more public scrutiny than ever in the recent years, leading to more and more public outrage and action like we are seeing from r/wallstreetbets.
Also, this whole situation has proven that Reddit can make a meme out of anything.
So, I leave you with this, while there are always stories in the mainstream media that are sad to read, at least we can always rest easy knowing that Reddit is actively screwing over Wall Street.
Thank you for reading! I hope you enjoyed, and feel free to leave your thoughts (or screw over Wall Street) below! If you would like to read some of my other works, check out this piece about party switching in primaries. Or my thoughts and explanation on the recent FBI raid on Donald Trumps home. Thanks for reading, and have a great rest of your day.
“Hedge Funds.” 2013. https://www.sec.gov/investor/alerts/ib_hedgefunds.pdf.
Ibid.
Zeisloft, Ben. “Bed Bath & beyond Stock Soars 300%, Wall Street Loses Millions Thanks to Meme Traders.” n.d. The Daily Wire. Accessed August 17, 2022. https://www.dailywire.com/news/bed-bath-beyond-stock-soars-300-wall-street-loses-millions-thanks-to-meme-traders.
“R/Wallstreetbets.” 2011. Reddit. 2011. https://www.reddit.com/r/wallstreetbets/.
“NEW THIS AM: Warren Calls on the SEC to Address Stock Market Gamesmanship amid Volatile GameStop Trades | U.S. Senator Elizabeth Warren of Massachusetts.” n.d. Www.warren.senate.gov. Accessed August 17, 2022. https://www.warren.senate.gov/newsroom/press-releases/new-this-am-warren-calls-on-the-sec-to-address-stock-market-gamesmanship-amid-volatile-gamestop-trades.
Ibid.
I swear this must be your favorite subject!! You get passionate about underdog stories and I love it. great article.