How people came together to bankrupt the most powerful billionaires in the trading market
What happened at the beginning of this year on January 28 with GameStop is an incredibly huge moment in the history of the stock market. The institutional investors, ie, the hedge funds who are well known for playing out their manipulative strategies in the stock market to make more money for the wealthy, were just defeated at their own game by retail investors -- people who were always put down by the hedge funds.
Hedge funds are composed of rich institutional investors. There is a minimum requirement to invest with hedge funds. They are groups of wealthy investors who are capable of making more money for the wealthy by exploiting any company in the market.
They do this using what is called an LBO (leveraged buy-out). It is the process of buying another company using money from outside sources, such as loans or bonds. The assets of the company being acquired are used as collateral for the loans. When the companies being acquired are against the transaction, it is often referred to as a “hostile takeover.”
Hedge funds draw their money from pension funds or other funds and use that money to buy out entire companies and all of their stock. And because it is their company now, they can get rid of their own debt by dumping that debt right onto the company.
Hedge funds act as a separate entity from corporate entities, which is why if they bankrupt their companies, they will not owe a single dollar. The liability is on the company they dumped their debt onto. This squeezes the company, and forces it to sell off its assets and fire its employees; the savings the company makes by doing this goes straight to hedge funds.
Over the last 10 years, people have lost 600,000 jobs with companies like Toys“R”US, Brookstone, Payless, and many more.
For the first time, retail investors who had traditionally been put down by hedge funds realized that they could squeeze the short positions from the hedge funds by banding together through strength in numbers.
It all started with Wallstreetbets, a part of Reddit (which is basically a social media platform). Inside Reddit, there are many subcommunities or "subreddits."
GameStop stock dropped 52% in 2019, and it started off as a bad year for the video game retailer. However, people on Reddit saw that this company was being heavily shorted and found an opportunity to make money by driving the prices up. They looked at which of the stocks were most shorted, or how many shares there were outstanding in the market to trade in relation to how many of them were being shorted.
One of the reasons why Gamestop’s stock price soared is because the stock had more shares shorted than there were on the market to borrow. When people were betting on a stock to go down, these people on Reddit joined together and decided that if they bought enough of these stocks then it would force these short sellers or people who were betting on the stock to go down to then cover their positions by buying more of that stock. And this is exactly what happened.
The hedge funds were forced to spend more of their money to cover their positions. As there was a lesser supply of the stocks, the prices soared. Reddit people showed that by uniting together they could beat the hedge funds at their own game through price manipulation, which is what hedge funds have been doing since the beginning of history.
According to The Guardian, a redditor wrote to Melvin Capital, the most prominent of the GameStop short selling hedge funds: “You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. I dumped my savings into GME, paid my rent for this month with my credit card and dumped my rent money into more GME. This is personal for me and millions of others. I’m making this as painful as I can for you.”
It actually had some Reddit people ask the question: “Have you robbed your local billionaire yet?” But things eventually turned upside down. On January 28, when GameStop shares were riding high at US$483 a piece, Robinhood and many other fintech apps stopped allowing people to buy these stocks, destroying the momentum of the battle.
These apps told people that it was for safety reasons, but the truth was that it was to destroy the flow of trading in order to save the hedge funds who were completely getting wrecked. People were blocked and censored. The underlying truth is that these fintech apps only act as a middle man because every time people buy or short a stock, they are actually getting their orders rerouted through market-makers.
One example of this is Citadel, which was one of the biggest short sellers of GameStop stock: They lost billions of dollars trying to short the stock. For this reason, GameStop stocks came under renewed pressure on Thursday, falling more than 40% to just under US$54.
What cannot be denied though is that the unity of the people did bankrupt the most powerful billionaires in the market for the first time ever in the history of trading.
Nree Raha Adrija is a freelance contributor and a Marxist activist.