Retail-Driven Stock Market Surge Restricted By Wall Street Behemoths
The Intelligent Insurer #5 — Gamestop Development Highlights Flawed Financial System. INFI Insider Whitelist Lottery soon.
An online community of self-proclaimed “degenerates” has successfully exploited a centralized financial system that has historically been in the grasp of big players. A group of day traders belonging to Reddit group WallStreetBets coordinated buying activity in several shares where hedge funds held leveraged short positions.
While buying activity was coordinated in several stocks, the poster child of the event was Gamestop Corporation, which recorded a near-vertical rise from the Monday open to the Wednesday close. The share price of the gaming shop which has a largely defunct business model rose from under $20 at the start of January to over $340 in recent trading.
The reason such a significant price surge was able to occur in a company that has little fundamental value is because of the overbearing presence of a minority of small players. Funds with long-term holding mandates like Fidelity, Blackrock, and Vanguard have gobbled up significant percentages of the outstanding shares for their pension funds and other clients. These shares are included in the portfolios of these behemoths to add diversification to their passive investment products. The below table lists the largest holders of Gamestop Corporation.
With the limited supply that remained, several hedge funds had the idea of taking leverage short positions on the troubled stock. However, retail had a different idea.
Noticing that the hedge funds were over-leveraged short, there was a cascade of call option purchases in Gamestop which catalyzed a monstrous rise in the share price. The price rise caused a short squeeze on the side of the hedge funds and forced them to liquidate their leveraged position by buying, putting more upside pressure on the price.
This event caused quite a stir among Wall Street’s elite. The outcry was followed by the CEO of Big Tech company Robinhood restricting trading in several stocks that were being bought by retail. Gamestop was included among the stocks where trading was halted.
This Robinhood decision received raucous backlash. It appeared to be nothing less than a collusion between Big Tech and Wall Street. The attack against retail has spurred class-action lawsuits by platform users and an upcoming Senate hearing to discuss the matter. Venture Capitalist Chamath Palihapitiya noted in a tweet that the Robinhood founders lack integrity.
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