“This week demonstrated that unsustainable excess in one small part of the market has the potential to tip a row of dominoes and created broader market turmoil,” Goldman Sachs strategists wrote in the note. And that in turn caused other investors to take chips off the table, continuing the negative feedback loop. To raise cash, they had to sell completely unrelated but highly liquid stocks such as Apple Some faced margin calls, requests to put up more capital when positions weaken. Here’s why: Hedge funds that bet against GameStop and other Reddit-favored stocks were forced to take steps to counter their losses. The S&P 500 suffered its worst week since October – and some analysts at least partially blamed the Reddit-fueled mayhem.
The enormous losses for hedge funds and other short-sellers spilled over into the broader markets last week. The hedge fund eventually had to get bailed out by Citadel and Point72, two hedge funds that provided a $2.75 billion lifeline. Melvin Capital, a hedge fund that bet heavily against GameStop, lost a stunning 53% of its value in January. That in turn has driven GameStop even higher, creating even more losses for short-sellers. WallStreetBets successfully triggered an epic short squeeze, where investors that bet against GameStop have been forced to unwind their bets and buy the stock back. (GME) lost a quarter of its value Monday but it’s still up nearly 1,200% on the year. (AMC) and other stocks skyrocketing in recent days. Robinhood CEO details 3:30 am call to put up $3 billionĪ mob of traders on Reddit’s WallStreetBets page have sent GameStop (Photo by Noam Galai/Getty Images for TechCrunch) Noam Galai/Getty Images As it stands today, their share price is $25.32.Įat The Rich: The GameStop Saga is streaming on Netflix now.Co-founder and co-CEO of Robinhood Vladimir Tenev speaks onstage during TechCrunch Disrupt NY 2016 at Brooklyn Cruise Terminal on in New York City. Still, out of all of this, one positive is the online traders might have saved GameStop from going bust. While we were in the boom and euphoria then, things have definitely pivoted to crash now – with the bottom of the crypto market falling out over the past year, leaving many first-time online players on the market severely out of pocket. John Cassidy wrote in the New Yorker at the time: “We can say that almost all speculative manias happen in four stages: displacement, boom, euphoria, and crash”, adding that the boom was indicative of “buying in the hope that you will be able to get out before everything goes to hell…This is the peculiar logic of collective action that I have called, in the past, ‘rational irrationality’.” It added that the big appeal - apart from shits and giggles for a population under lockdown - “is a form of wealth transfer – the only losers in this trade are large hedge funds, and the winners are lower-income internet users, some of whom are only putting up a few thousand dollars.” Did the stunt end up pulling capitalism down for good? These funds have historically been able to shift the price of a stock for their own benefit, whether that is the “pump and dump”, or by openly and heavily shorting it”. As The Guardian reported at the time: “A lot of people are crowing that this is giving large hedge funds and traders a taste of their own medicine. This led some customers to file lawsuits against the brokerages, and demand that inquiries be set up to investigate what happened, as well as online financial regulation in general. As a member of the Financial Services Cmte, I'd support a hearing if necessary.” We now need to know more about decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. Alexandria Ocasio-Cortez tweeted at the time: “This is unacceptable.
Some brokerages, including Robinhood – ironically named after the man who stole from the rich to give to the poor – halted the sale of GameStop stock and other volatile stock that the Redditors were cashing in on on their apps, leading to claims of “market manipulation”. Bloomberg noted that short sellers had lost a total of $6 billion due to the squeeze. Unsurprisingly, the finance experts who lost out were incredibly pissed off. Netflix What was the effect of this bulk-buying of stock?
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