A Reddit forum had Wall Street freaking out when the members of the subreddit pulled ‘short squeeze’ in video game retailer GameStop stock.
American videogame company GameStop’s shares soared over 400% this week after aggressive touting of the company’s stock by several members of a recent subreddit r/WallStreetBets. Yes, a Reddit forum had Wall Street freaking out when the members of the subreddit pulled ‘short squeeze’ in GameStop stock.
However, the frenzy did not end there. The Reddit message board that was breaking the internet was briefly taken private by its moderators on Wednesday, adding further confusion to a wild day.
“We are experiencing technical difficulties based on unprecedented scale as a result of the newfound interest,” the WallStreetBets subreddit said in a message, adding that enforcement of the forum’s rules and Reddit’s content policy became increasingly difficult.
“WSB will be back,” the moderators added.
The forum broke the internet after tons of its users appeared to have helped fuel a so-called short squeeze in GameStop (GME) stock, where investors who had used options to bet against the stock needed to cover those bets by buying shares.
The forum was talked about all over the internet after pumping up a collection of stocks and pushing some billion-dollar financial institutions to the brink of bankruptcy.
What Exactly Happened?
Among the three main players in this drama, other than GameStop and WallStreetBets, was Hedge fund Melvin Capital. Just a month earlier, GameStop’s stock was hovering near $15. Melvin was shorting the stock, hence the need for a bailout. On Monday, Melvin required $2.75 billion bailout after the video game retailer’s stock price spiked to more than $70 a share over the weekend. The news of Melvin Capital’s financial struggles sent GameStop’s share price soaring even higher, with the company’s stock price ending up at $100 a share on Monday. This put the hedge fund in an even more precarious financial decision. As of this writing, the stock was trading for $347.51 per share—81 times higher than its share price of $4.28 a year ago.
Melvin capital on Wednesday, after suffering heavy losses by betting against GameStop, closed out the position and repositioned the portfolio, a spokesman for the firm said. “Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop),” the spokesman said in a statement.
With WallStreetBets pulling the short squeeze, speculations about Melvin capital going bankrupt started doing rounds on the social media. However, the spokesman also said that the firm, once among Wall Street’s best performers, is not collapsing. “The social media posts about Melvin Capital going bankrupt are categorically false,” he said.
What Is Short Squeeze?
A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals. A short squeeze can occur when there is a lack of supply and an excess of demand for the stock due to short sellers covering their positions.
Why Is Wall Street Freaking Out?
However, Wall Street uses this tool according to its convenience. And that’s why this act by the Reddit forum has been considered as a turning point in history. After Melvin Capital closed its position, the WallStreetBets is now combing through other hedge funds with massive short exposure like Melvin Capital. Their intention is clear- short squeeze as many hedge funds into bankruptcy as they can.
The undercurrent in Wall Street is that such public joining should be held illegal. But well, its ‘poetic justice’ for many who think Wall Street is getting the taste of its own medicine.
As an independent media platform, we do not take advertisements from governments and corporate houses. It is you, our readers, who have supported us on our journey to do honest and unbiased journalism. Please contribute, so that we can continue to do the same in future.
