It started when a Reddit group named “r/WallStreetBets” began encouraging members to begin buying stock in the struggling company Gamestop.
When a group of Redditors banned together to buy stock in GameStop and the company stock skyrocketed by more than 800% in one week, Wall Street and the government took notice.
It started when a Reddit group named “r/WallStreetBets” began encouraging members to begin buying stock in the struggling company GameStop. But, many on Wall Street had already been betting against GameStop’s success, meaning that they borrowed shares in the company and sold them, promising to buy them back at a later time. If a company’s stock has lost value then they would make a profit.
When the price of GameStop shot up because thousands of everyday people began buying the stock, those same Wall Street investors, known as short-sellers, began losing billions of dollars in what is known as a “short squeeze.”
“That's when a lot of people on Wall Street short sell a stock," Stephen Gandel, senior reporter for CBS MoneyWatch, told Inside Edition Digital. "And what that means is that they've sold a stock that they don't own, betting that it's going to go down in price. But the problem is, when it goes up, they have to buy those stocks, those shares that they don't have to close out their position.”
GameStop was the most shorted stock on Wall Street in January and investors on the Reddit board noticed that and chose GameStop to encourage others to invest.
“By buying it as a group, they’ve been able to take these short sellers off guard, and they have to race around to find the shares, [and] there aren’t many. This isn’t Apple! That’s driven the stock from $4 all the way up to $350,” Gandel said.
The group has now extended their efforts to other companies— like AMC, Nokia and Blackberry — fueling stock price surges in them as well. The White House has taken notice of the volatile market, and on Wednesday the White House Press Secretary, Jen Psaki, released a statement.
“Our economic team, including Secretary Yellen and others, are monitoring the situation. It's a good reminder, though, that the stock market isn't the only measure of the health of our economy. It doesn't reflect how working and middle-class families are doing,” Psaki said.
There is nothing in the law that prevents the Redditors' actions, but now stock trading apps like RobinHood are preventing users from buying new shares of GameStop, AMC and other companies. Investors can now only sell shares.
On Thursday, Robinhood was hit with a class action lawsuit, filed in the Southern District of New York, accusing the trading app of “purposefully, willfully, and knowingly removing the stock ‘GME’ [GameStop] from its trading platform in the midst of an unprecedented stock rise [which] thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market,” the Hill reported.
"We continuously monitor the markets and make changes where necessary," Robinhood said in a press release.
Charles Schwab and TD Ameritrade have also put similar freezes in place as of Wednesday.
“There are strict Wall Street rules against large investors, hedge funds, institutions, banks getting together and coordinating buying stocks. But, because this is individual investors, there's nothing particularly wrong with it,” Gandel said. "Individual investors are all allowed to go on stock chat boards, or call each other up, or use whatever means of communication and tell each other they like the stock and buy.”
The Securities and Exchange Commission said they are “actively monitoring” what’s happening.
The r/WallStreetBets now has more than 3.8 million members in their Reddit group.
RELATED STORIES
