The Robinhood / Reddit Debacle: Is Tech at Fault?
Last week’s GameStop/Reddit debacle & David and Goliath development shook the stock market to its core.
Let's take a closer look at what went down.
In short, the stock GameStop has grown nearly 8,000 percent in recent months. It doesn’t take a market expert to realize that this is quite odd given that video game stores are on their way out as they are needed less and less to purchase video games.
Last week, GameStop stock was widely “shorted”. What this means is many hedge fund billionaires bet on the company’s trading price to go down. If it does go down, they make money for betting against it.
A “short squeeze” then occurred like we have never seen before. While hedge funds were busy shorting the stock betting it would go down, large online forums on Reddit began to post positive messages about the stock, thus driving up the price.
This means that hedge funds then had to unload the GameStock stocks they bought at a high price at an even higher price.
One trading service, Robinhood, restricted the trading of GameStop midway through the day once their executives saw what was going on. This seems to be a little suspect.
In total, it is estimated short sellers lost north of $23 billion dollars on GameStop in January alone. Astronomical.
This all occurred thanks to a Reddit feed called WSB, whose positive chatter drove up the price of the stock. WSB’s chatter hit the mainstream media, which then caused more and more people to buy the stock.
So, in essence, this was a win for the little guys. The every day people.
Here is an article that probably better summarizes what I am trying to say:
Technology has undoubtedly make it easier for people to become involved in the stock market. What happened on Reddit, though, is something we have never quite seen before.
Similarly, the presence of prominent figures on Twitter has began to also factor into the stock market.
Take Elon Musk, for example. Every time he hits send on a tweet, he has the ability to change the flow of the market.
Last year while on the Joe Rogan show, Musk took a drag of a joint on live air. Tesla stock plummeted.
Now, is this all good or bad?
In my opinion, it is a double-edged sword.
On a positive note, technology has made it incredibly more simplistic to buy stocks. Whether you are catching up with the latest estimates in real time or clicking a button to make a trade on your iPhone, the market has become much easier to navigate all thanks to technology.
On the negative side, perhaps we are entering into dangerous waters when a stock price can fluctuate due to online activity – be it a tweet or discussion forum.
Big firms shorting stocks is undoubtedly controversial. And while the little guys won the other week, what unfolded creates some uncertainty in the world of trading.
Never before had a bunch of amateur people influenced the stock market and won against the big guys: major hedge funds. Well, it happened. And it could again.
How can this be fixed? To be honest, I am no expert on stocks. I do not know. But once again we come to the subject of technology and how it is infiltrating our lives at every twist and turn.
Technological capabilities have made trading a more simplistic endeavor. But now these capabilities are further being used and factoring into what drives a stock up or down. Do we really want that? I’d love to hear your thoughts below… and please correct any mistakes I made in this article as I know next to nothing about finance. Ha.
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