Fat cats lose billions after internet tip
In what seems like a modern day twist to the Robin Hood story - a gaming company's stocks have become a batteground between the rich and the poor with Reddit users attempting to bankrupt hedge fund managers.
US company GameStop is a brick-and-mortar video game retailer that has been struggling with profits due to store closures, decline in physical sales and the COVID-19 pandemic.
Its stock has been hovering between $US3 ($A4) and $US10 ($13) for much of the past year but has hit four straight days of increases.
At one stage its stock was priced higher than Apple, Facebook, Microsoft and Disney, as it surged by 93 per cent with its shares climbing above $US300 ($A393).
Individuals investors, many from the Reddit sub group that has nearly four million members, have driven the share price up using an app called Robinhood. It lets anyone trade stocks without commission.
Billionaire Elon Musk added more fuel to the fire when he tweeted a link to the Reddit message board, which saw GameStop's stock end the day on Wednesday up nearly seven times its value from where it was less than a month ago.
The feud is playing out because of a stock market strategy called "short selling".
WHAT IS SHORT SELLING?
It was the subject behind the Academy Award-nominated film The Big Short, which starred Brad Pitt, Ryan Gosling and Christian Bale, which revealed how the GFC was triggered by the United States housing bubble.
Basically, it's when investors make a profit by selling stock they think is going to dive in value and then buy it back at a lower price.
Ryan Cohen, founder of pet food company Chewy, who recently joined the GameStop board had noted that the company was one of the most shorted stocks after be bought a large amount of shares in August 2020.
Reddit users were looking to stick it to the "fat cats" of Wall Street.
As word spread on its message board that a hedge fund was planning to short sell GameStop's stock - users decided to get their own back with what is described as a bull raid. They bought up stock before it could drop in price and rapidly inflated its value.
It meant all those traders who had bet on a decline in value were losing serious amounts of cash.
One big hedge fund, Melvin Capital, needed a bailout as GameStop stock spiked but denied it was facing bankruptcy. There are predictions more big players will need an injection of funds to stay alive.
A shortseller at hedgefund Citron Capital, Andrew Left, said he was being threatened and harassed for betting against the stock.
According to analytical firm S3 Partners, short sellers in GameStop were down $US5 billion ($A6.5 million), which included $876 million of losses early Tuesday, reported the New York Post.
Meanwhile, three of GameStop's biggest investors gained as much as $US5.5 billion ($A7.2 billion) from the stock frenzy.
Trading was actually halted on GameStop shares nine times on Monday and three times on Tuesday due to the volatility.
WHO'S WEIGHED IN?
Well the world's richest man, Musk tweeted "Gamestonk" and a link to the Reddit forum, which pumped about $US4 billion ($A5.2 billion) into the stocks.
Then there was New York congresswoman Alexandria Ocasio Cortez who called on the rich to be taxed in a series of tweets.
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
White House Press Secretary Jen Psaki said President Joe Biden's team was "monitoring" GameStop's current situation.
The author of The Big Short, Michael Burry, also tweeted in a now deleted post: "There should be legal and regulatory repercussions," he wrote. "This is unnatural, insane, and dangerous."
The top securities regulator in Massachusetts, William Galvin, said he wants to see a 30-day trading suspension of GameStop on the New York Stock Exchange, adding that "small and unsophisticated investors are probably going to be get hurt by this".
He believes that GameStop's trading needs "regulatory intervention" and an "example" needs to be made of GameStop to prevent similar occurrences.
Some people will make millions but others might lose everything because the bubble will burst. There's no doubt GameStop's share value will drop significantly.
But GameStop is not the only innocent player being used in this game of fat cat and mouse. Other struggling companies like Blackberry has shot up by 172 per cent this year and cinema chain AMC, Nokia and Bed Bath & Beyond have also had their stocks skyrocket.
Analysts predict that amateur investors are going to continue to chase tips from Reddit discussion threads and private Facebook groups to move in on loss-making firms.
"I don't think this is a fad, it is a generational shift in how people think about investing their money," John Patrick Lee, ETF manager at VanEck told the New York Post.
"A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard (Wall Street) and individual traders who are on the rise."
Originally published as Fat cats lose billions after internet tip