GameStop? Reddit? A breakdown of what happened in the stock market

Reddit made the news as it drove up GameStop’s stock price, but many are not clear on what exactly happened.

Gavin Sidhu, Media & Culture Editor

A community on Reddit banded together to put the squeeze on hedge funds that had bet that GameStop’s shares would fall. In the midst of the fiasco, the stock market was the focal point of conversation both in the media and among Malvern’s community. During the period, millions of Americans, especially those among youth, found themselves taking a crash course on the stock market.

In late January, millions of amateur traders challenged some of Wall Street’s best investors, intrigued by both get-rich-quick hype and a way to teach Wall Street a lesson. The reddit community Wall Street Bets began and augmented the movement after one of their members discovered something huge.

One Malvern student, who wished to stay anonymous, said that his father taught him some of the ins and outs because of GameStop.

“I never really talked about stocks with my dad,” the student said, “but recently we discussed the news about GameStop and he sort of used the opportunity to teach me about the stock market. He said that he’s focusing more on his investments as he nears retirement, and so we talked a lot about IRAs and stuff like that.”

The student has taken a lot more interest in the stock market after learning about its nature.

“I can’t trade myself yet because of my age, but I’ve been keeping an eye on some stocks that I may want to buy in the future.”

“I believe his name was Keith Gill,” said Joe Fricker ‘21, president of Malvern’s stock market club. “He was doing a lot of fundamental analysis on the [GameStop] stock; he believed it was undervalued, and there were a lot of posts back in the fall and the winter regarding how shorted the stock was.”

Fricker says that hedge funds had sold the stock before buying it, and that they were hoping the share price would fall instead of rise, which confused many amateur traders because the strategy is usually “buy low, sell high.”

“Basically, a lot of hedge funds, which are institutions that manage decently large amounts of assets, were short selling the stock,” Fricker said. “They were selling the stock before they bought it, hoping that the stock would go to zero and hoping that GameStop would go bankrupt.”

Soon after the discovery, Wall Street Bets began buying up and holding a ton of GameStop stock, hoping they could create a short squeeze.

“These hedge funds have short positions, they want the stock to go down, and when the stock goes up, they lose money,” Fricker said. “When they short stocks and the stock starts to go up, they’re taking losses, and eventually they have to prevent further losses by buying it back.”

Despite being a truly historic event in the stock market, the GameStop situation wasn’t the first time a short squeeze was created.

“It happened back in 2008, with Volkswagen,” Fricker said, “and that’s what everybody was hoping for. That’s pretty much what happened.”

Around 140% of GameStop’s shares ended up being shorted, which is more than the total number of shares.

“There was a lot of talk regarding failures to deliver, which is when someone buying the stock either either doesn’t have enough money to pay for it, or someone selling the stock doesn’t have the stock to give to you,” Fricker said, “and it has to happen if a stock is shorted above 100%.”

Several brokerages halted trading involving GameStop, with the media focusing on Robinhood, which allows users to trade for free. A large portion of Robinhood’s income comes from sending their trade data to various institutions.

“One of the institutions that provides a significant amount of their revenue in exchange for their trade data is Citadel, which is the parent institution of Melvin Capital,” Fricker said. “Melvin was the biggest hedge fund in the news, because they had a very big short position on GameStop, so it was a very obvious clash of interest that led to a lot of public outcry.”

Fricker says that the most likely reason for the halting of trades was because of the lack of liquidity (cash or assets easily converted to cash) from clearinghouses, which are the institutions that process the buying and selling of stocks.

“They didn’t have enough liquidity to be able to buy and sell, and Robinhood themselves, for example, one of their brokers didn’t have enough liquidity,” Fricker said. “Those clearinghouses were getting buy orders, and they didn’t have any shares to give to the people who wanted to buy.”

Following the halting of trade involving GameStop, the share price sharply declined.

“The stock price crashed from there,” Fricker said, “but the controversies surrounding it has only shot up, and they just had a congressional hearing as a matter of fact.”

Despite the outstanding narrative by Reddit to try and teach a lesson to hedge funds, Fricker believes that a lot of traders were simply in it to make a quick buck.

“It was definitely interesting to see everybody go, ‘yeah, let’s destroy these hedge funds,’ but I think a lot of it is inherently fueled by greed,” Fricker said. “It’s an opportunity to make a lot of money in a relatively short amount of time.”

Fricker says that the news surrounding GameStop’s stock has made everyone more interested in the stock market.

“I think something that’s really good that came out of this is that it definitely got everybody more interested in the stock market,” Fricker said, “when you see a stock go from sub $20 up to $500, that catches everybody’s and eye makes everybody want to get into it.”

As the president of the stock market club, he also thinks that Malvern students’ interest in the stock market has risen.

“Some guys came up asking about what was going on, and I had some really great conversations with guys who I didn’t know,” Fricker said. “They were looking at the stock market and they were like ‘I got this stock, and this stock,’ and talking about GameStop.”

“It was a crazy time, but it was a good time because it got everybody interested in the stock market, which I think is always a phenomenal thing, no matter how.”