As you look at the stock price of the GameStop retail company, there are three things to keep in mind. First, Wall Street is simply a place where money is mixed with emotion. Second, the Internet is the real world. And third, Wall Street will always win, especially if you trade stocks with the Robinhood platform.
If you haven’t been following the news, GameStop retailer shares have risen dramatically recently: On January 22nd, GameStop experienced a 69% rise in stock value, and the trend ended at the end of the week. Then on Saturday, January 25, GameStop exchanges on the stock market stopped nine times.
On the surface, this does not make sense at all. GameStop, which was founded a year before Blockbuster, is now in the grip of physical businesses that have been pushed to the brink of extinction by online stores. These days, you can easily buy video games on the Internet, and you do not need to go to a certain passage in a certain city to get a physical version of the same game. As a result, the GameStop business has also suffered.
Many people are now stuck in their homes and bored. As a result, the desire to participate in stock exchanges has increased more than ever. A special forum on this topic has also been formed in the Reddit community r / WallStreetBets Is called. A year ago, a user named Delanedi argued that the market valued GameStop less than its real price. For a while, the fact that r / WallStreetBets members had to save GameStop was nothing more than a joke – but then it took a serious turn. The general idea is to punish people known as Short Sellers.
But what does Short Selling mean? If you think the stock of a company like GameStop is on the decline and may even lead to bankruptcy, you can make money from this process. This is usually done through Short Selling. You borrow some stock from brokers, (ideally) sell it at a high price, and then buy the same stock (ideally) at a lower price and return it to the broker. This can be very profitable, especially if the company goes bankrupt and you do not need to return the shares at all.
But the important thing about slimming shorts is that if the value of the stock goes up, you lose money, and if the value goes up and up, the loss is practically unlimited. A few other bad things can happen, for example, stock exchange fees go up or the major investors ask for their stock to be reclaimed. This means that shorts sellers are forced to “compensate” or have to buy stocks at a high price, and thus the stock value goes up even more.
This is called Short Squeeze and then a new mentality is formed. Because many investors are losing money, a kind of chain reaction is formed and you buy enough stocks to increase the value. So those who have suffered losses have to buy stocks to make up for the loss, and the value goes up again. Then other people who have suffered a lot buy stocks and this process continues.
For amateur investors, this process has become easier and cheaper thanks to apps like Robinhood. In addition to the possibility of buying and selling stocks in this application, you can buy options for stocks instead of buying stocks themselves. Then, if you are sure that the stock is profitable, you can buy a Call Option that allows you to buy the stock at a specific price and on a specific date.
Suppose our imaginary investment company wants to buy Company X’s full option. X shares are currently priced at around $ 10 per share. I have a lot of confidence in the performance of Company X, so I buy an option that allows me to buy 100 shares of it on March 1 for $ 25 per share. Such a contract usually costs less than the stock price.
Now let’s assume that the situation is epic for Company X, and on February 15, the value of each share reached $ 50. If I want, I can sell my options for a higher amount than I paid for them. Or I can keep the options until March 1, pick up the stock that was $ 55 by that date, and sell it right away. As a result, I earned $ 30 per share, not counting the options I paid.
On the other hand, I may have gambled wrong and Company X shares are only worth $ 20 per share. In that case, my loss will be limited to the commission I paid for the options and I will never buy the stock at all. This makes options a more risky gamble than buying X Company stocks directly, because instead of getting the stocks I want, I may lose all the money I paid for the options. But one can also be optimistic: I have never had to spend all my money together to buy stocks. If you find risk-taking fun, options are an ideal option.
Now someone has to be on the other side of my stock exchange. The group that sold the options to me tries to reduce the risk of being damaged by my options and starts buying shares in Company X. This causes the value of the stock to rise, and the higher the value, the more shares must be bought on this side of the exchange.
Options were a very sophisticated method of stock trading in the not-so-distant era, and ordinary people never entered this world. But the RobinHood app has made option exchanges easy and free. On the other hand, stock exchanges also have a social dimension, and this is where r / WallStreetBets comes into play. The stock has now become a meme and you are trading it to shuffle among your friends.
Daily stock traders (people who focus only on short-term investments), such as those found on the r / WallStreetBets forum, are often bullied and traded by professional traders. But the professional shorts that raised the possibility of squid shorts underestimated the complexity of the day-to-day trading, and r / WallStreetBets members took full advantage of the opportunity. It was time for Wall Street to be trolled and some of its biggest investors to lose a lot of money.
The members of r / WallStreetBets decided that the market value of the gamestop was lower than it really was and that its stock value should rise. So they started spreading the word about buying gamestop options. This pushed up the value of GameStop shares, and peers had to buy shares to keep the market balanced. On the other hand, as people bought more options, so did the buying of stocks. What led to the rise in value? You guessed it, which led to the shorts being forced to compensate and increase the value again. As of Jan. 26, the shorts were trolled, losing $ 5 billion from GameStop alone.
But what does Robin Hood have to do with all this? This app makes trading options more accessible to amateur investors – but there is one more thing. Exchanging at RobinHood is completely free. But Robin Hood does not like the eyes and eyebrows of people who provide them with free exchanges. The company hires some of the world’s largest investors, such as Citadel Securities, to monitor the performance of amateur shareholders. This phenomenon is called payment for order flow. Citadel Securities automatically receives these orders from the other party and thus earns money. The difference between buying and selling is compensated in the same way.
For some, the argument is that with this approach, amateur investors will get better prices than what is found in the open market. But this approach is controversial anyway, as some critics believe it hurts investors. In theory, it is possible for professional investors to be one step ahead of customers, buy stocks themselves, and make small profits if stock prices rise. But there is no evidence that Citadel Securities did that, and the US Securities and Exchange Commission has banned such tricks.
Robin Hood says his clients are mostly “buy-and-hold” investors. But in any case, the winner of the game is Citadel Securities. As of June 2020, the company was responsible for 40% of amateur investor exchanges. And the company not only takes RobinHood orders, it also works with TD Ameritrade and Charles Schwab. “Not only is the trading volume of amateur investors increasing, but so is the likelihood of a profit per trade,” said Tyler Glash, director of the Healthy Markets Association.
This means that even Wall Street can turn Wall Street into black soil. We would be very surprised to hear that high-frequency exchange algorithms have not played a role in the situation. Shamath Palihapiti, a leading figure in the world of SPAC Silicon Valley companies, has also decided to join the editors. On the other hand, Ilan Mask, a man who has repeatedly expressed disgust with shorts, is watching the whole riot.
At this point, you may be wondering if r / WallStreetBets is legal at all. After all, a group of people are trying to artificially increase the value of a company’s stock in order to make big profits. And the answer is: maybe. Everything seems like an illegal ploy to raise prices and sell stocks, but – this is a very important part – no one is lying. In theory, the US Securities and Exchange Commission could prosecute r / WallStreetBets investors – because no one is really anonymous on the Internet – but it would not be a case in point. “This is a nightmare for the judiciary,” said James Cox, a professor at Duke University School of Law.
Finally, it’s no longer just a matter of GameStop: r / WallStreetBets investors are now turning to Nio, which makes electric cars, as well as OG, BlackBerry and AMC. What will happen next? We do not know. But we think someone on Wall Street will finally find a way to make money.