Wolf of Broad Street: UGA community discusses squeeze on Wall Street short sellers

The tale of Robin Hood, a tights-wearing crusader whose credo was, “Steal from the rich and give to the poor,” dates back to the 15th century. Today, Robin Hood is more than a man, and his mantra is a movement.

Wealthy investors intended to make a profit by short selling GameStop’s stock, but they did not foresee that a syndicate of Reddit users with Robinhood accounts, several of them University of Georgia students, would have something to say about it.

“When you short [sell] a company, what you do is borrow stock and sell it at the price it’s at and say you will repay them later. You expect that the price goes down, so the stock that you borrowed can be sold more cheaply,” said Jeff Netter, head of the University of Georgia’s Terry College finance department.

Short sellers make a profit by pocketing the net value of the stock after it decreases from its initial value. Regardless of the price, the stock must be returned to the lender — therein lies the inherent risk of short selling.

Reddit users on the forum r/WallStreetBets wanted to give the short sellers on Wall Street a squeeze. Users banded together to encourage buying up GameStop stock through Robinhood, a free investment app, to inflate the stock’s price and force short sellers to take a sizable loss. Investors who expected GameStop to tank had to buy back the stock at a ballooned price.

“It’s kind of based on nothing right now,” UGA junior Spanish and cognitive science major Jordan Herrell said on Thursday. “But there’s this mentality of, ‘Let’s get Wall Street; let’s form a picket line on this stock,’ and that kind of crazy, crowd-sourced Reddit movement has moved [the stock] tremendously.”

The princes begged of the paupers


Some retail investors, or non-professional investors, cashed in big time, and hedge funds footed the bill. Hedge fund Melvin Capital closed out its position with GameStop on Wednesday, relying on financial support from other hedge funds to keep from folding.

Redditors on r/WallStreetBets are encouraging each other not to sell their GameStop shares, so as to “hold the line” and further bludgeon Wall Street bigwigs in the process. Not all investors shared the same ambitions — some traders were more concerned with reaping a profit than sticking it to the man.

Herrell fell somewhere in the middle. Bored and intrigued by the Reddit hype, Herrell decided to buy into GameStop with profits she had made on previous investments. In the moments before she sold for a profit Thursday morning, she said she felt a rush.

“It was kind of an adrenaline thing watching it. I was watching it in class on Zoom. I didn’t turn my camera on … because I was looking at my investment account the whole time,” Herrell said.

Other participants from UGA shared Herrell’s level of captivation. Hundreds of students in various GroupMe messages discussed the market, their own trades and the status of their investments in GameStop, AMC and Dogecoin.

Problems for the merry men


On Thursday afternoon, Robinhood announced that “in light of recent volatility” it would be restricting transactions on several securities, including GameStop, as well as raising margin requirements.

Raising margin requirements increases the amount of money an investor must have in their brokerage account after a stock purchase. This effectively curbed many users’ ability to interact with GameStop stock.

Netter attributes Robinhood’s reaction to a desire to avoid more stringent regulation from the U.S. Securities and Exchange Commission. Netter argues that increases in regulation would hurt the retail investors that Robinhood relies on.

“In general, whenever you do more regulation, Wall Street wins,” Netter said. “It’s kind of like the alcohol commercials who say, ‘Don’t drink and drive.’ I mean, they are trying to say you need to be careful.”

Robinhood users at UGA cried foul.

“Robinhood, the largest micro-investing firm and platform through which these shares are being traded on, decided to cut off trading from the major stonks [sic] people are making so much money off of today,” said Matthew Walshe, a UGA sophomore and member of the WSB [Wall Street Bets] at UGA GroupMe.

Walshe called Robinhood’s move toward restrictions “fishy” after seeing large investment firms and hedge funds openly express their disgust for the situation.

On Thursday, Robinhood user Brendon Nelson filed a class action lawsuit against the app for alleged breaches of contract, implied covenant of good faith and fair dealing, fiduciary duty and negligence.

The lawsuit alleges that “Robinhood essentially abandoned its customers altogether by pulling GME, a standard of care so far below what is required for a business engaging in time sensitive trading services that it amounts to a complete abandonment of its duties.”

Litigation was not the only way forward, however. At the onset of the restrictions international spectators sprang into action and started buying up GameStop stock.

On Thursday, Justin Sun, a Chinese millionaire tech-entrepreneur, tweeted that he would be purchasing stock from Asia in support of r/WallStreetBets investors.

“AMERICANS CAN’T BUY GME, BB?!?! HELP IS ON THE WAY!! CANADIANS!! WE HAVE NO SUCH RESTRICTIONS!! BUY ALL THE GME AND BB YOU CAN!!!” one Reddit user on the WSB forum said.

By Thursday evening, Robinhood had agreed to reopen trading of the formerly restricted securities including GameStop. Meanwhile, UGA users with “diamond hands,” those who hold onto a stock expecting it to rise to a peak, or “to the moon,” eagerly awaited a predicted peak on Friday.

An arrow to the heart


Friday night, the SEC released a statement announcing plans to investigate the micro-investing firms’ restrictions of trade for potential “abusive or manipulative trading activity.”

The crusade has left Wall Street closing out its worst week since October. According to CNBC, hedge funds that were short selling the video game retailer have lost almost $20 billion so far, but it’s not over yet.

Economists disagree on predicted outcomes of this Reddit-led squeeze of Wall Street, but Netter is intrigued by what he sees as the beginnings of a transfer of power.

“Retail investors have finally gotten some power. I mean, yeah, they may have misused it here, but I am going to get myself a Robinhood account,” Netter said.

This article originally appeared in The Red & Black.

Published by Emily G. Garcia

Enterprise Reporter at The Red & Black

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