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The “WallStreetBets” Controversy Explained

Posted by on February 1, 2021 in Investing and Insurance with 0 Comments

During the last week, you've probably seen a lot of buzz on the internet about the “WallStreetBets” scandal. You might not necessarily understand what it is or how it works, but you've probably got the message that the traders and bankers who work on Wall Street aren't very happy about it. Large hedge fund companies have lost billions of dollars. Some of them are expected to go bankrupt. A few stocks that appeared to be dead and buried have suddenly rallied and risen in value by several hundred percent. To the untrained eye, it looks like anarchists have taken over the stock market – and that isn't far from the truth. If you'd like to know a little more about what's happened and how it all works, though, read on.

The first thing we need to remember about the stock markets is that they're a gambler's paradise. For all the experience that people have with stocks and shares and all the knowledge they accrue, there still isn't much difference between playing the stock market and playing the Aztec Gems slots UK game at online slots websites. The “gems” that brokers and traders chase might be more tangible and valuable than the ones that line the reels of that online slots game, but the same principles apply. Online slots are volatile – some more than others – and success is never guaranteed. Once you've decided to invest in something, your money is gone, and it will only come back to you if your investment pays off. This past week, traders got a short, sharp, painful reminder that they've been playing online slots this whole time.

The basic version of this story goes like this. For the past several months, traders have been ‘short-selling' shares in struggling companies like Gamestop. This involves ‘borrowing' stock from an established broker, selling it at face value, and then waiting for the price to fall. When that happens, you buy the stock back, return it to the person or entity you ‘borrowed' it from, and pocket the difference. The practice has long been thought of as dubious and unethical as it extensively damages the company whose stock is being short sold (in some cases putting them out of business with the loss of all associated jobs), but it's legal and is, therefore, permissible.

The people who have issues with short-selling believe that it literally involves profiting from people's misery. Companies are forced to close, jobs are lost, and livelihoods are ruined, but people betting on those failures make millions of dollars from it happening. They have an active stake in companies failing, and when those companies do fail, it enriches hedge funds that already have enormous power and influence. The “WallStreetBets” movement is a counter-attack against short selling. For the first time in history, everyday people have organized themselves on platforms like Reddit and Discord and bought Gamestop stock in bulk. With thousands of people suddenly buying shares, Gamestop’s stock went up rather than down. People who’d bought shares made huge amounts of money. People who’d tried to short-sell stock suddenly found that the ‘borrowed’ stock they needed to return was now worth more than they’d sold it for, and so they had to pay the difference. Those who’ve attempted to perform short-selling on an enormous scale were left with colossal debts – debts large enough to sink entire hedge funds. Melvin Capital Management required a sudden $2.75bn bailout from private investors to avoid being wiped out completely.

Unsurprisingly, Wall Street traders who are accustomed to profiting from short positions are furious about the sudden viral intervention of (largely) Millennials and Generation Z traders in the market. Some have called for federal intervention against the groups. The Discord chat group was briefly suspended. The associated Reddit group was taken down for a few hours. Both are now back up, and the people involved in them are working out what to target next. The explosion in press coverage of the past few days has inspired even more people to sign up, which means that the groups' collective stock buying power is increasing exponentially. Movie theater company AMC has found its stock price shooting through the roof. There's talk that struggling airlines might be next. Brands that were on the verge of bankruptcy are suddenly being flooded with cash. Those who would profit from them going bankrupt are losing money hand over fist.

Nobody knows where this will go next or how it will end. The Financial Times saw the need to publish an article about the ‘trend,' in which it claimed the movement wasn’t a revolution. It's impossible to escape the suspicion that they're secretly worried that the reverse might be true. An open letter with more than sixty thousand ‘up votes' on the WallStreetBets Reddit forum warns Melvin Capital Management that they ‘stand for everything the group hates' and that this is an organized movement that will put an end to the practice of making money from the exploitation of struggling companies. They might succeed in that aim. If these groups aren't kicked off their social media platforms, and they're able to keep their current level of momentum going, short selling will no longer be a viable method for getting rich. The associated risks would be too high. People would be forced back to making money the old-fashioned way by investing in companies that they want to see do well rather than those they want to see fail.

Against the backdrop of all this, hedge fund managers are furious and terrified. Some find managers claim this is a form of financial terrorism. Others say that their activities ought to be declared illegal. In reality, though, nothing the groups have done breaks any law. People are free to invest their money as they see fit, and stocks rise when people invest in them. It would be more accurate to say that Wall Street brokers are being beaten at their own game, and they don't like it very much. The system is being gamed, and the people doing it are treating it as if they're playing a video game, but the law is on their side. The world of investments might be about to change forever, and 2021 has barely started!

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