Roles Reversed

How Reddit Investors Caused Hedge Funds to Lose Millions

Image from U.S

Ellie Sullivan

The stock market is on the rise, and it’s not just the stocks themselves. From the urban businessman to the rural farmer, everyone is taking their chance to participate in this economic franchise. 

Millions of people shook the market last month when the stocks for the presumed bankrupt companies Gamestop and AMC suddenly skyrocketed in value. This event caused an uproar in the economic world, sparking conversations on whether or not this should be legal.

Traders on the popular web forum Reddit are to blame for these events. The low stocks of GameStop and AMC soared due to individual traders banding together to increase their value. Although this seems like a good thing, this upwards spike caused hedge funds, or wealthy traders, to lose millions of dollars. 

To grasp the full severity of these events, a basic understanding of the stock market is necessary. When dealing with stocks, a short seller, such as a hedge fund, will borrow stocks from a broker. The short seller will then sell the borrowed share to the market for the current market price of that stock. The short seller does this because they anticipate a decrease in its value on the market, which is what they want. The short seller will then buy back the stock at the lower market price and profit off of the difference. They will then return the shares back to the broker at their original value. In this business, the short seller is benefiting because, if all goes right, they make more profit off of difference than the shares themselves. This process is called short selling.

When Reddit users came together to buy the GameStop and AMC stocks, it caused the shares to rise in value. When this happened, it forced the hedge funds to buy back the stocks at a higher price, costing them millions of dollars. 

Since hedge funds have bigger names and more money in the stock market world, they were able to lobby for trading apps like Robinhood to remove the GameStop and AMC stocks, protecting them from further damage. This caused so much commotion that new legislation is in the works to ensure this situation will never happen again. Politicians like Ted Cruz and Alexandria Ocasio-Cortez spoke out to condemn the legislation limiting trading and have called for hearings to take place before the decision. 

The current argument at play is that the modern stock market better resembles a casino than a reputable business. Hedge funds have profited for many years by working on the inside with large corporations. They let small investors lose money using similar tactics to the one used in the GameStop and AMC situation. It was only when the roles were reversed, and the hedge funds lost money, that anyone caused an uproar and urged new laws to be made regarding the stock market. 

Since the Gamestop and AMC stocks were removed from Robinhood, they have soared once again. It is still yet to be seen whether or not new legislation will pass to protect hedge funds from future, similar situations. 

Not much has changed. Hedge funds continue to manipulate the stock market for their benefit. However, traders are hopeful that, after this event, the market will become fairer for the small investors in the future.