Let’s open this one with a caveat: the situation which we’re discussing here is evolving rapidly and the ultimate resolution remains unseen.
Investors and markets have been repeatedly astounded over the last few weeks by an unprecedented series of events around video game retailer Gamestop. Largely regarded as a dying institution, Gamestop was subject to an attempted short followed by a crowd-supported short squeeze, which thus far has cost the relevant hedge funds billions, throw markets into chaos, and very nearly led to the temporary closure of the NYSE. So, with those events in mind, how did we get here?
The story starts with a stock market struggle between two contrasting groups of people: one the hedge fund Melvin Capital, a major player in the industry. The other is a community of internet users found on Reddit. For those who are unfamiliar, Reddit is a news aggregator, content collection, and social media platform. Reddit is organized into groups called subreddits, in which users gather around a particular interest. One particular subreddit, r/wallstreetbets, is a gathering place for small investors and market enthusiasts. Users on this r/wallstreetbets became aware that Melvin Capital was attempting a short sell of several firms, including Gamestop, AMC Theatres, and Blackberry. In response, a large group of small investors from Reddit implemented a short squeeze, buying up a large number of shares of the relevant stocks in order to push the prices higher and cost Melvin Capital billions. They did this via Robin Hood and similar apps for small investors, with thousands and thousands of Redditors effectively pooling their money for a coordinated crowd-sourced short squeeze.
Their motives vary, as is natural for such a large group, but when one reads the comments on r/wallstreetbets a few themes become clear. Most of the people behind the initial short squeeze were not profit-motivated, but rather acting out of feelings of revenge. Many of them were teenagers during the 07/08 collapse, and blame the market leaders and hedge funders for the privations their family endured at that time. This dissatisfaction with the status quo led many to join short squeeze with no concern for their own money. The issue snowballed rapidly from there, with tech leader Elon Musk joining the fray and urging on the Redditors.
Faced with these unprecedented and nigh-surreal circumstances, conventional investors, firms, and markets were lost for a response. The flood of new investors and innumerable small-scale investments strained computer networks and nearly led to the temporary closure of several brokerages and exchanges. Robinhood, the most popular investment app used by the Redditors, temporarily halted trading on Gamestop and the other subject stocks. This led to a further popular backlash, the outcome of which remains undetermined.
Currently, many of the investors behind r/wallstreetbets have turned their attention to silver, targeting a number of smaller Australian silver producers in an attempt to recreate their success with Gamestop. Their motives are similar to the previous short squeeze and the effects of their action are starting to show. The market is, for now, responding with caution.
So what does this mean in the long term? The best bet is that regulatory changes will result, although what form they finally take will depend on how the various regulatory agencies and Congress respond. There are concerns about the market as a whole, although many of those are based on responses to unprecedented small investor activity rather than actual market conditions. We advise an ongoing attitude of cautious optimism and judicious investment decision making. Every change in circumstance leads to opportunity, and savvy investors will proceed as such. Now is the time for experienced and cool-headed professional guidance to help you illuminate the blind spots on your path to success, so consulting a professional financial advisor is an important step in navigating these changing times.