This week some stocks on the US financial market experienced very abrupt and unexpected fluctuations caused by amateur investors, who moved en masse to buy stocks and other financial products, partly organized and partly influenced by a channel on the Reddit social network. which is called r / wallstreetbets.
On Thursday night, the stock of GameStop, a chain of video game stores, plummeted 44 percent after major apps and brokerage platforms prevented users from buying the company's stock, and then rose more. 60 percent a few hours later, when Robinhood, the most used app by amateur investors, announced that it would partially unlock the stock trading. In the previous seven days, GameStop's stock value had risen by 435 percent. The same has happened for AMC, a cinema chain, while non-professional investors who organize themselves on Reddit or are influenced by it have also begun to increase the value of the shares of other companies, such as Nokia, Blackberry, American Airlines.
The exceptional volatility in the markets, linked to the initiatives of r / wallstreetbets, has been so influential and widespread as to create a lot of confusion: the US stock market has seen the largest increase in trading volume since its peak in 2008, just before the financial crisis. The activities these days have resulted in losses of billions of dollars to famous and respected investment funds (back to that) and attracted the attention of the SEC, the regulator of the American stock exchange, as well as many US politicians and even the government. .
In the last two days, above all, the situation has been particularly confusing. On Wednesday night, the Reddit channel r / wallstreetbets, from which the initiative was born and which is used by amateur investors to organize and exchange advice, was offline for several hours before becoming available again. In addition, as of Thursday, some well-known brokerage platforms, such as Charles Schwab, eToro and ETrade, have begun to prevent the trading of stocks and other investment products of stocks such as GameStop and AMC. At one point, Robinhood was also added to the block, which is the brokerage app by far the most used by amateur investors, that is, those who are causing the big upheavals in the market these days. Robinhood, like other platforms, has made it impossible to do any kind of trade, other than to sell everything (which is exactly the opposite of what Reddit users would like to do).
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The official reason for this block is that brokerage platforms, which are the ones that actually make the purchase of stocks and other investment products on behalf of users, must deposit a certain amount of money with financial institutions that are called “chambers of compensation ”, to limit the risks of default. The fluctuations in the market would have increased the risks to such an extent that the money paid would not have been enough, and Robinhood and the others would have had to deposit more before resuming transactions. At the same time, however, since Robinhood has among its main investors one of the investment funds that have lost billions in operations these days, the platform has been accused of having prevented the purchase of shares for reasons of convenience: some users, yesterday, they sued her and many US politicians called the situation unacceptable.
Political and financial authorities have also begun to take an interest in the situation. The SEC, which is the supervisory authority of the US stock exchange, has said it is monitoring the situation. Jennifer Psaki, the White House spokesperson, also said Treasury Secretary Janet Yellen is following developments in the markets, and added that this story shows that the stock market does not reflect “the situation of families”.
What is happening, technically, is a “short squeeze”: Reddit users have identified some titles – first of all GameStop – on which large professional investors had made a lot of short sales, that is financial bets in which you earn if the value of the company decreases and is lost if it rises. Thanks to a coordinated activity, albeit in a chaotic and difficult to analyze way, the users of r / wallstreetbets, which has just under three million subscribers, have convinced many people to buy stocks and options (i.e. risky financial products in which you bet on the rise of a stock) of those companies, causing a domino effect: the more the value of the stock increased, the more investment funds lost money, and on the basis of the mechanisms of short selling they were forced to buy new shares to limit losses, causing the stock's value to rise even more (in this article we have made a more in-depth description of how GameStop's “short squeeze” worked).
On Reddit, and later on other social networks, the success of GameStop's “short squeeze” has generated enormous excitement (often accompanied by vulgar and comradely tones), and the sudden increase in the value of the stock has attracted many other amateur investors who were looking to make quick profits, and that in recent days have extended their interest to other stocks with similar characteristics.
A phenomenon that until a couple of days ago seemed limited to a couple of stocks has therefore expanded considerably, upset the ordinary market trend and caused losses of billions of dollars to famous and respected investment funds: D1 Capital Partners, $ 20 billion fund, Thursday lost 20 percent of its value, Point72 10 percent, Maplelane 45 percent, Citron Research eliminated all of its loss-making short sales on GameStop.
The very serious losses of investment funds are in a sense a consequence of the operations of Reddit users, but for many they have also become a target: on r / wallstreetbets there is a very strong feeling of revenge against the “bigwigs” of Wall Street, the headquarters of the US stock exchange, and this sentiment has become prevalent on social networks, as a tweet from left-wing American congresswoman Alexandria Ocasio-Cortez summed up: “It must be admitted that it is truly remarkable to see Wall Street financiers who have always treated our economy like a casino complaining about an online bulletin board whose users are also treating the market like a casino “.
Gotta admit it's really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino
– Alexandria Ocasio-Cortez (@AOC) January 27, 2021
It is still necessary to understand how long this confusion will last, and whether the dynamics and balances of the financial markets will change significantly after what has happened in the last few days. According to some experts (and according to the managers of the damaged investment funds), there is the possibility that the organizing activity done by amateur investors on social networks could constitute market manipulation, even if it is a decentralized and made action. with public information. On Wednesday, as we said, the Reddit r / wallstreetbets channel was inaccessible for a few hours, while Facebook closed at least one similar group, with over 150,000 users.
Experts are also divided on the long-term consequences: some believe that, after the euphoria of these days, the markets will return to normal. According to others, however, the influence of amateur investors, who now generate about a quarter of all exchanges on the financial market and who have very different investment priorities from those of professional operators, will have lasting and long-term consequences.
