What is Happening on Wall Street?


Photo courtesy of WallStreetBets logo on its Reddit thread

Ethan Schwartz

If you didn’t know about the turmoil occurring right now on the stock market, it would not be far-fetched to say you’re living under a rock. Right now, the worlds of finance, politics, and social media are all being bombarded with information about the current event of Redditors directly influencing the stock exchange and massive hedge funds alike. It is a scenario like never seen before, and it is in dire need of some clarification and understanding. A group of ordinary retail investors is all grouped to inflate the price of multiple stocks that are considered to be failing. This should not make any sense, but right now, logic is being turned on its head. First, let’s get into the participants of the current discourse.

r/wallstreetbets is a group of people who talk and give stock advice on the website reddit.com. The Reddit thread, founded in 2012 and February 1, 2021, consists of almost 8 million members and is known for encouraging aggressive and risky trading options. They are a juvenile group, using internet slang and humor in the world of finance. According to the forum, their purpose is to “make money and be amused while doing it.” Right now, they are doing just that by using their typical risky behavior to wage war on the massive hedge funds of wall street.

Hedge funds are financial partnerships in which the hedge fund managers take money from their partners and invest the money into the stock market in the hope of providing positive returns for them. In return, they often will take a percentage of the profits and charge a management fee. Hedge funds are an alternative way to invest in the stock market, where investors don’t have to worry about moving their money and can let someone do it for them. Usually, people who participate in Hedge funds have a high net worth or have access to large amounts of money.

The conflict between these two parties began when members of the r/wallstreetbets subreddit found out that many prominent hedge funds had a lot of money put into shorting failing companies like Nokia, Best Buy, AMC movie theatres, and, most notably, GameStop. When someone shorts a stock, that means that they are essentially betting against its success. To do this, they will borrow shares from their stockbroker at an initial price. If the stock price falls, they can repurchase the shares and the lower price and keep the difference. However, if the stock goes up, the person shorting the stock has to buy back the shares they borrowed at the new price to reduce the amount of money they lose. Once r/wallstreetbets found out that the hedge funds were shorting GameStop, they decided to all at once start investing in the stock to make its value rise. They figured that by doing that, they would not only ruin the hedge funds that were causing the rich richer, but they would also make a profit themselves as a result of the hedge funds putting their money back into the stock to reduce losses. Over the week of 1/20/21-1/27/21, the stock went from $39.12 to a peak of $347.51 when the market closed for the day. Elon musk supported the subreddit preached to hold onto the stock with “diamond hands” until the hedge funds all covered their shorts. It is believed that this still has not happened yet, and despite a nearly $150 drop, the stock recovered as people anxiously waited for their returns. As of January 30, 2021, the affected hedge funds are down 19 billion dollars.

This battle between Reddit and wall street has not come without its fair share of drama. Many people believe that what r/wallstreetbets is doing is against the law and commit financial fraud. Other people argue what they are doing is perfectly legal and that they are doing society a favor by “eating the rich.” Conflict only increased when Robinhood, a stock trading platform widely used by the Redditors because of its ease of use, restricted access to GameStop stock. They claimed that this was due to an inability to pay the necessary collateral, which protects brokers. Robinhood is under an attack of lawsuits now, but it looks like they will get out of them due to their mandatory user-agreement.

Like any war, there are two sides to this one. One side is that of the people who think that the collapsing of hedge funds and the mass turmoil on wall street is either funny, empowering to everyday people, or payback to the super-rich for hoarding. The other side consists of both hedge fund participants and other skeptics. The hedge funds are doing what they can to end the chaos and stop their bleeding. Many other people see this event as merely stupid, stating that it is more like gambling than investing. They believe that all the drama will end without profit for the investors and that as the shorts are covered and the Redditors run out of money, the stock will go to a regular price and leave all of the diamond handed investors with nothing.

There is no telling who is right, so lying back with a nice cold beverage and attentive eyes might be the best thing to do. Or, an investment into AMC or dogecoin might be more exciting. You do you, man.