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The Events and Fallout of the Robinhood-Wall Street Fiasco

By Spencer Grossman Smisek

New York City, New York

As of January 29, the retailer’s shares were up more than 1700% in 2021 (Photo Credit: The New York Times)

During the week of January 25, a group (r/WallStreetBets) of financial enthusiasts on the social media platform Reddit brought Wall Street to its knees. Before then, the mention of retail chain GameStop (GME) evoked nothing more than nostalgia as many of its locations have shuttered in 2020 in the midst of a years-long struggle. As of January 28, however, the WallStreetBets-GameStop phenomenon exemplified a massive paradigm shift in the world of finance. As of January 29, the retailer’s shares were up more than 1700% in 2021, leading to dramatic highs and lows for everyone from amateur investors to hedge fund giants.

Several hedge funds—including Melvin Capital, which ended down 53% in January—had shorted (bet against, in other words) GameStop in recent months. The r/WallStreetBets group saw an opportunity to buy GameStop shares, pushing the stock up and forcing a “short squeeze.” Because ‘shorting’ a stock entails that it has been ‘borrowed,’ hedge funds had to purchase GameStop shares at a higher price, therefore accelerating the growth of GameStop share prices. In simpler terms, the hedge funds, who had bet against the stock, had to buy it back to cover their losses while Reddit traders were simply buying, and this led to a massive increase in the price of GameStop stock (from January 25-27, GME stock rose 352.6%).

The buying frenzy eventually led to the restriction of sales on trading platforms such as Robinhood, (which day traders, like the members of r/WallStreetBets, use) as buying limits were placed on these recently volatile securities. These restrictions launched another dramatic political sub-plot in which members of both parties spoke out against Wall Street’s ability to shield itself from further loss and embarrassment with the stemming flip of a switch that halted the prosperity of smaller, independent buyers.

Was the halting of trading by platforms such as Robinhood and Ameritrade a directive from the Wall Street clearing houses to protect “their own” wealthy investors? Perhaps it’s not so sinister. According to Jordan Belfort, known as the Wolf of Wall Street, the fiduciary responsibility of these brokerage sites is to control the risk to its users. In an interview with Newsmax, Belfort said, “Robinhood is in a terrible position because they are a the end of the day, when this thing collapses, and it will, and the brokerage firm booking all these trades will be liable for the losses and could literally lose $10 billion dollars in a single day...”

With the volatility spurring much public and political outcry, the mass buying of these shorted stocks has only seemed to increase. With an influx of new members, r/WallStreetBets is showing no signs of slowing and has added to its list of targeted troubled companies, which include AMC (AMC) and Bed Bath and Beyond (BBBY).

The broader markets have suffered due to what the Wall Street Journal reports was a necessary sell off of long-term positions by investors to recoup the massive losses on shorted stocks. As the market continues to fluctuate by great margins, the Security and Exchange Commission (SEC) is paying close attention and attempting to ascertain if acts of collusion or manipulation were committed. Both Democratic Representative Alexandria Ocasio-Cortez (NY-14) and Republican Senator Ted Cruz (R-TX) have agreed on Twitter that the actions of apps such as Robinhood were “unacceptable” and warranted investigation. Until then, spectators and participants alike are left to wonder if we are witnessing a true shift in power for the financial markets, or simply an isolated incident.

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