Individual Investors’ Anger against Wall Street Hedge Funds and their Unity

GameStop short squeeze is an event that has had a major financial impact on certain hedge fund companies in January 2021, when a short squeeze occurred in securities on several stocks, such as GameStop (abbreviated GME). With this short squeeze, the stock price of GME, a video game retailer, rose 190 times from the lowest level, and rose to about $500 per share, the highest price on January 28, 2021, causing great damage to the short selling force. 140% of GME ‘s total stocks were being sold short, and attempting to buy stocks to close the short sale prompted a short squeeze phenomenon. This short squeeze case was led by a gathering of investors using RobinHood HTS with no transaction fees gathered at Reddit’s r/wallstreetbets. On January 28, Robinhood blocked users from buying GameStop and other companies securities, crossing the political spectrum and others such as U.S. Senator Ted Cruz, Alexandria Okacio Cortez, and Tesla CEO Elon Musk. Many politicians and businessmen criticized this as market manipulation. In addition, a class action lawsuit against Robinhood was raised in the District Court for the Southern District of New York.

Let’s talk about “Short” briefly. Short is one of the financial investment techniques. A short-selling expert borrows stocks, sells them immediately, and later covers them at a lower price and pays off the borrowed stocks, including interest, and uses the margin. It’s a technique for earning money. This technique can theoretically increase the stock price indefinitely, so the loss can be infinite. This is in contrast to long positions where the investor’s losses are limited to the maximum initial investment.

In the case of GME stocks where the short squeeze took place, about 140% of the total GME stocks were in the short position, which means that the stocks that were borrowed from short selling were lent again from other short selling forces and sold. Investors at Reddit’s r/WallStreetBets believed GME shares were fairly undervalued, and because many of the stocks were short-sold, the so-called Short Squeeze, which boosted the stock price and caused the short-selling forces to end up paying huge losses and liquidating short positions.

GameStop, a retail store specializing in game sales in the United States, has been hit hard by COVID-19. At this time, as the GME stock price fell, many institutional investors short-sold the stock. Individual investors did not view short selling, which is the dishonest method of these investors, and the public was reminded of the past when Wall Street hedge funds made money even during the events they caused by short selling even during the 2007-2008 global financial crisis. They felt anger towards it. Eventually, in order to bankrupt investors who short-sell, r/WallStreetBets users collectively bought GME stocks and call options. When they raised the stock price so much, the forces hitting the short sale were struck by a short squeeze and bought and paid off the stock at a price higher than the borrowed price. For this reason, Melvin Capital, who short-sold GME, suffered a huge loss. Melvin Capital suffered tremendous losses, consuming 30% of its $12.5 billion in assets at the beginning of the year, and eventually received $2.7 billion from other investors to close the short sale. In other words, it can be summarized that this short squeeze incident was unveiled by individual investors’ anger and short-lived attacks against the short-selling forces.

By: Junhong Park