Epic Wallstreet VS MainStreet Battle Begins

By Orbex

In a move that will be talked about for years to come, it seems like the average everyday trader is fighting back against the big dogs of Wall Street.

Reddit’s WallStreetBets has been the talk of the market over the past few weeks. The forum used retail traders’ purchasing power to put the squeeze on institutional investors and short-sellers.

In turn, the focus has shifted to GameStop. The company has seen its stock price skyrocket, rising more than 1,700% since the start of January.

Shares have gone from trading at around $43 to over $400, becoming one of the most traded stocks on the market along the way.

Why Did This Happen?

Basically, short-sellers profit when a stock goes down.

On one side you have hedge funds and short-sellers, which have placed bets that a company’s stock will crash. These are the big players on Wall Street – sort of investors millions of people rely on to make the smart decisions that boost their portfolios.

On the other, you have a band of mostly young day traders who coordinate on Reddit to drive up the share price of struggling companies.

On a rebellious tone, investors following the Reddit group bought a ton of GameStop stock. As a result, short-sellers had to buy shares to cover their losing bids.

In turn, this drove the stock up even more. And in a controversial move, the trading platform Robinhood stopped retail users from investing any further.

They did, however, leave the door open for institutions to trade.

Did Things Turn Ugly?

The move slammed the upward surge in share prices into reverse.

It also sparked allegations that the hedge funds had wielded influence over Robinhood and other trading platforms to stop the rout.

The fallout even caused unlikely accord between opposite extremes of the US political spectrum. Republican Ted Cruz and Democrat Alexandria Ocasio-Cortez both called for a hearing into the decision to halt the trades.

The Securities and Exchange Commission said they were aware and actively monitoring the on-going market volatility.

Of course, if market manipulation seems apparent to the SEC, it could lead to enforced action against any traders that have demonstrated an intention to manipulate the markets.

Can an online forum have that much influence?

The forum’s influence on GameStop’s stock shows that markets must adapt to a world where retail investors are gaining some of the power big financial firms have long held.

Reddit co-founder Alexis Ohanian stated that this, for a lot of people, that was a statement as much as an investment.

Who joined in to promote the rally?

CEO Elon Musk appeared to join in fuelling the fire.

In a tweet that sent GameStop shares flying further, the mogul stated:

Former Daily Show host Jon Stewart also chimed in, tweeting:

What else was affected?

The metal market certainly felt the effects.

Both Gold and Silver rose sharply in yesterday’s trading. Whereas the gold spike reverted to its original stance, silver was a different story.

The precious metal rose by over 6% intraday following multiple posts on WallStreetBets that suggested executing a short squeeze on silver.

A short squeeze occurs when a price increase for an asset prompts a rush in buying activity by those who previously bet that prices would fall.

The attention turned to silver in particular since Reddit day traders were restricted from the hot stocks of Gamestop and AMC.

AMC Theatres was one of the other companies that have been targeted by short-sellers.

WSB and now other amateur investors are going after other short positions, hoping to induce a similar short squeeze. This consequently drove AMC shares up by 265%.

Has this happened before?

There was a similar occurrence called the ‘dot-com bubble’ in the late 1990s.

This was a period of massive growth in the use and adoption of the internet.

As a result, many investors were eager to invest at any valuation in any dot-com company and technology stock associated with the internet.

The crash came about due to market overconfidence. Pure speculation had led to valuations of companies being fictitious.

Tech startups would not realistically turn a profit until after the start of the millennium. Therefore, this led to a catastrophic sell-off, causing several internet companies to go bust.

How will the market be different after this?

There is some belief that WSB signals the arrival of a powerful new force.

The future could see a large number of retail investors finding influence by acting or following one another into a big trade.

This may serve as a reality check to hedge funds, which are used to throwing their weight around without ordinary investors affecting prices.

How far will this go?

This move had caused a great deal of worry. In fact, some analysts have stated that investors do not own GameStop, only speculators do.

The current pandemic has created a unique situation where many people who have gotten into day-trading really have no idea exactly what they’re doing.

Often, a short squeeze ends in a price falling back to where it was before the drama started.

History suggests that no stock can go up forever. And over time, stock prices generally reflect the expected future earnings of corporations.

Already, since RobinHood has blocked new purchases of the stocks, the price has plunged dramatically.

So in reality, is a short squeeze actually a good thing for companies that are expected to eventually go out of business?

By Orbex