The “r / Wallstreetbets” (aka WSB) group is a historic subreddit channel where more than 3,5 million Reddit users discuss highly speculative trading ideas and strategies. Recently, the community has caused massive disruption to the financial markets.
On September 19, 2020, a Redditor named Player896 posted a post in the discussion titled "Bankrupting Institutional Investors For Dummies, ft GameStop.", Which outlined a strong bullish case for GameStop (GME on Nasdaq shares), a company that mainly sells video games and consoles.
The GameStop opportunity
The author noted that GameStop's shares had been short sold by a number of institutional investors, despite "the company's records being solid" and Chewy CEO and co-founder Ryan Cohen spent nearly $ 76 million. dollars for a 12,9% stake in the company.
Cohen - Apple Inc.'s largest individual shareholder - joined the board of GameStop on January 11 along with two former associates of his pet products company, driving up the share price by 50%.
Despite this, a handful of hedge funds along with other institutional investors continued to short-sell GME shares. This was likely an attempt by big players to outdo amateur traders and induce panic-driven sales.
Reddit's WallStreetBets community saw this as an opportunity to fend off the financial elite and decided to unleash a buying rush in hopes of creating a strong short squeeze.
A short squeeze might sound complicated, but it's actually a relatively simple process. When institutional investors short a stock, what they actually do is borrow a number of shares that they believe will drop in value, sell them at the highest possible price, and try to buy them back later at a lower price.
If successful, they return the initial borrowed amount and pocket the difference. However, if the market turns against him and the share price rises, the trader is forced to buy back the shares at a loss. Also, as short sellers are forced to buy back the asset when a short squeeze occurs, this helps push prices even higher.
WallStreetBets crushes hedge funds
Melvin Capital, a US-based hedge fund, and Citron Research were among the short sellers hardest hit by WallStreetBets' army short squeeze. Two major hedge funds, Citadel and Point27 Asset Management, stepped in to bail out Melvin Capital with a $ 2,75 billion deposit.
In nine days, GME stock was up more than 1.800% from $ 19,79 to a high of $ 380. Cohen's 13% stake in the company is now worth $ 2,5 billion. In response to this extraordinary event, Adena Friedman, CEO of Nasdaq, the second largest stock exchange in the world, said the platform has begun monitoring social media and will stop trading if another WallStreetBets-led action is reported.
