GameStop Stock Surge is Making Wall Street Go Crazy

The New York Stock Exchanges Broad Street entrance on Wall Street.

Photo via wikimedia commons under creative commons license

The New York Stock Exchange’s Broad Street entrance on Wall Street.

Ava Curtis, Staff Writer

Recently, Wall Street hedge funds found that retail firms were really suffering at the beginning of the pandemic. Lockdowns kept people from going to shops, so stores like GameStop were in massive financial trouble.

The hedge funds made a huge bet that businesses such as GameStop will fail and go out of business shortly. Investment firms like Melvin Capital, in this case, bet big on GameStop’s share price, using the strategy known as short selling, in which they borrow GameStop shares from lenders at a small fee and promise to give them all back by a set date. Immediately after borrowing these shares, the firm sells them at their current value, with the prospect that the share prices will soon fall. Then, after the share price falls as they predicted, the firm can repurchase these shares at their lower costs to earn a net profit.

Hedge funds were so confident that GameStop’s stock would plunge that they compounded their shorts over months and made billions of dollars. This proved to be such a gold mine that more big-time investors wanted in, borrowing more stocks practically than they could ever buyback. As of Jan. 22, 72 million GameStop shares were “shorted”.

Meanwhile, a group on Reddit called “WallStreetBets” was able to predict the hedge funds’ plans and call their bluff. In a coordinated plan on the site, these everyday people and amateur investors were able to spread the word across other social media platforms and convince people to invest in the GameStop stock.

Because of this maneuver, in just a few days, the share price jumped from around $30 per share to more than $340 per share. The few risk-taking Reddit buyers who started investing in GameStop in the summer of 2020 became millionaires, and a lot of average-joe traders who joined in this week were also able to make some quick money. After GameStop’s pieces jumped more than 1000%, the hedge funds, which assumed the stock would fail, were forced to pay out billions after losing more than $3 billion on shorts.

The amateur investors were buying stocks mostly through popular trading sites like the Robinhood app. However, the morning of Thursday, Jan. 28, everything came to a screeching halt when the brokerages like Robinhood and TD Ameritrade issued trade restrictions on GameStop, with no explanation to the public besides “ongoing volatility”. The restrictions and the sudden stock activity are even being monitored by the Biden administration.

Both Democrats and Republicans seemed to have similar reactions to how these events have unfolded, and an unexpected sense of unity developed between polarized public figures. Most notably, Congresswoman Alexandria Ocasio-Cortez tweeted on Jan. 27, “Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.”