The GameStop Situation Explained
(In Simpler Terms)
I’m sure by now, that you have heard about how GameStop’s stock price has grown exponentially this past week. To make it short, large hedge funds were found out to be short selling GameStop stocks. When Redditors on r/wallstreetbets got wind of this occurring, they decided to drive up the stock price, by organizing a mass buying of GME.
Now, let's return to what short selling actually is. Essentially, investors will borrow a stock, give interest to the person who lent the stock, and sell said stock at market value. The investor hopes that the price of the stock will decline from the day that they borrowed and sold it, by the day that they have to give them back. In essence, they hope that they will be able to rebuy the stock at a lower price than they previously sold it at, and either make money if the price lowers, or lose money if the price increases. Though, this practice is seen as extremely unethical.
Putting this into relation with GameStop stock, after Redditors got wind of hedge funds such as Melvin Capital shorting GME, they bought a mass of stocks to make the price rise greatly - approximately 1300% from the 14th of January to the 28th. This caused many different hedge funds to have to buy back the stocks at greatly elevated prices, in consequence for abusing the system. To save Melvin Capital from bankruptcy, different stock trading platforms, such as Robinhood, and another hedge fund called Citadel injected nearly $3 billion into it. This is where the controversy in this situation is stemmed from.
Representative Alexandria Ocasio-Cortez said in a tweet, “This is a serious matter. Committee investigators should examine any retail services freezing stock purchases in the course of potential investigations - especially those allowing sales, but freezing purchases”. This tweet opened the eyes of people on either side of the political spectrum to the economic injustices of this situation. These large trading corporations were running to aid their large hedge fund partners, while abandoning their retail users. These company’s decisions to stop trading of certain stocks sparked outrage, and protests in front of Robinhood and Citadel’s headquarters.
Taking a look at this situation with a critical lens, it is ironic to see how those who praise the stock market, and Wall Street, are now limiting the general public from using and manipulating the markets in the way that they do themselves.