Shares of companies like GameStop ($GME), AMC Entertainment ($AMC) and Virgin Galactic ($SPCE) went on big runs this week. The mainstream media has made these purchases out to be calculated ‘pump and dump’ schemes by users. But this isn’t correct.
First, we need to understand what a short is. “Shorting” is something investors do when they think a stock is going to go down. Specifically, it’s the process of borrowing a stock, turning around and selling that same stock in the hopes it will drop. Once the stock has dropped, a short position can be “covered” by buying the stock back and returning it to the lender in question.
In this case, thousands of redditors on r/WallStreetBets and other communities identified something strange: more shares of GameStop had been shorted than existed. This is called “naked shorting” -— and it is illegal. So, smart retail investors started buying shares of stocks like $GME, which was 130% short.
This quickly spiraled beyond a “profit-seeking trade” and into a full-on assault on the hedge fund and financial services industry. The $13.1 billion hedge fund Melvin Capital was forced to close their position after taking on significant losses. They were eventually bailed out by Point72 (owned by Stephen Cohen, the owner of the Mets and inspiration for the character of Bobby Axelrod on Billions) and Citadel (which handles order flow for many brokerages).
As of today, many broker services like Robinhood and TD Ameritrade restricted trading activity on these prominent “meme” stocks by alleging they were volatile and dangerous. Some brokers even started closing the positions of investors, causing significant backlash.
There is nothing discernibly illegal or wrong with what Main Street did this week. They pillaged Wall Street for gold, held them accountable for their involvement in illegal behavior and the markets can be more democratic because of it. For us at Bullish, the freedom of markets is extremely important. And though our team didn’t YOLO all our money on $GME, this is a subject matter worth highlighting.