The stock markets were in for one of the biggest surprises early last week, thanks to three names: GameStop, Robinhood, and Reddit. If you’re not familiar with the scenario, here’s a lowdown:
How Redditors rigged GameStop shares against Wall Street
GameStop, an American video game retailer, was not doing so well on the stock markets so Wall Street hedge funds had been shorting GameStop’s shares, betting that its stock was doomed to further decline. Shorting stocks – basically borrow low, sell high – makes Wall Street execs a lot of money.
Individual investors – any trader who doesn’t buy and sell stocks for a living – are often derided by Wall Street as “dumb money,” so a popular foul-mouthed Reddit page called WallStreetBets upended that narrative. While individually they don’t have the same buying power as a hedge fund that can buy millions of shares at once, the Redditors managed to band together thousands of individuals who bought thousands of shares. As their buying frenzy went viral, more individuals scrambled to get GameStop stocks on consumer trading apps like Robinhood.
Then what happened? GameStop’s stocks went from $20 on 12 January to almost $400 just 16 days later! Shares of GameStop finished by end January 400% higher, bringing its total gain this year to 1,625%. As a result, while a lot of individual investors made a lot of money, at least 2 hedge funds that tried to short GameStop got into trouble.
Melvin Capital Management and Citron Capital placed large bets that GameStop would drop in price, and together with other short-sellers suffered paper losses of around US$20 billion as the stock rallied. This scenario could be seen as a band of millennials beating big hedge funds at their game.
Robinhood and the ire of consumer investors
Robinhood also got into trouble because they didn’t expect such a surge in the amount of users buying the same stock all at once. People were buying stocks of GameStop, AMC, BlackBerry, Nokia, and other companies mentioned on the Reddit thread in huge quantities – brand names that millennials grew up with.
Robinhood didn’t have the capital to cover all those trades, so they limited the ability of traders to buy the call options, citing compliance with regulatory requirements. Then, some users realised that stocks they had were being sold off without permission. GameStop prices slid after those moves were in place, reversing a gain of more than 30%, and its stock prices have remained highly volatile since.
As a result, while hedge funds got the money to bail them out to the tune of billions (Melvin Capital were given a $2.75 billion bailout), individual investors who got in late on the game weren’t so lucky as they weren’t even able to get in on the game.
As of 1 February, Robinhood users can buy only one share in GameStop. The trading app is now facing widespread backlash from users, celebrities, and politicians, prompting some lawmakers to call on regulatory bodies to intervene.
The move to silver
After the huge disruption on the stock markets, the hot topic on WallStreetBets last week turned to commodities: silver.
As of Monday, investors have been frantically purchasing silver bars and coins, as well as shares of silver producers. Futures prices for silver in New York settled at more than US$30 per ounce on Monday – their highest level in 8 years unexpectedly – thanks to the trading frenzy that powered the precious metal to its biggest one-day advance in over a decade. Meanwhile, Chinese investors rushed into silver investments on Monday, pushing up Shanghai silver prices to their highest since September, up 9.27% at 5,939 yuan/kg (S$1,222).
Companies that mine silver also saw their stock prices skyrocket – mining shares on the Australian Stock Exchange saw double-digit gains, one company’s by 50%.
Silver dealers worldwide are struggling to cope with the demand. In Singapore, silver bullion dealers were inundated with customers dropping by their stores with empty cases to be filled with silver bars.
However, metals market experts say this surge is more likely helping, rather than hurting, the big boys. Some WallStreetBets users speculated that professional traders posed among them to start this rally for their own gain – a now-deleted post urged the group to push the price to US$1,000/ounce.
According to a WallStreetBets user: “By buying silver/going long on silver, you would be directly putting money into the pockets of the EXACT HEDGE FUNDS ON THE OTHER SIDE. The hedge funds are LONG silver NOT short silver.”