GameStop is the focus of a trading war between amateurs and Wall Street pros Image Credit: Jose L. Barros/Gulf News

American retail investors, usually the ordinary people who put small amounts in the stock markets hoping to make a small profit that would pay their extra expenses such as a nice short vacation or down payment on a new car or even school fees of their children, decided on Monday to revolt against the Wall Street giants. The code name of the revolt was ‘Short Squeeze.’

And it is quite a story. A real-life drama that is sure poised to make it to the history books. But it is in fact a serious revolt against the rich and powerful on Wall Street. According to some reports, the campaign has cost a number of hedge funds more than $20 billion (Dh73.4 billion) in losses in five days!

The term ‘short squeeze’ refers to a significant rise in the price of a stock, forcing traders who had bet against that stock — the short sellers, to buy more of that stock to avoid incurring more losses. By buying the stock, the short sellers ironically help the stock price go even higher and, in the process, incur more losses.

The small investors’ rebellion against Wall Street last week revolved around GameStop, a popular video game store, usually found in malls in most American cities. The company has expectedly been losing money for years, due to the rise of online gaming. With the coronavirus lockdowns in most 2020, the company suffered greater losses. Big Wall Street money short sold the stock — they bet that the stock will go lower in the next few months.

With Wall Street big players expecting the price to go down, other investors panicked and sold the stock — GameStop stock thus went down from $25 two years ago to little more than $3 few months ago. Apparently, young people still like GameStop. Many of them bought a game or two from the store at some points.

Robinhood to the rescue

These young people, who have been working from home or perhaps were made redundant because the economic impact of the pandemic, have been getting money from the government every two weeks, the stimulus checks. And without any place to go or spend, hundreds of thousands of them began experimenting with stock trading on a new trading platform called, ironically again, ‘Robinhood’.

Robinhood doesn’t charge commission on transactions and doesn’t require a minimum amount to trade — most of these platforms require at least $10,000 for trading. Robinhood became popular among those young investors. Then, there came in Redditt, the popular chat board platform.

Those young investors started talking to each other on the chat board, especially the most popular one, WallStreetBets. They exchange trading tips, suggest which stocks to buy, etc.

Few of them learnt that Wall Street was shorting GameStop, their once popular video game hangout. They decided to campaign against that by putting more money into the stock. They urged everyone on the chat board to ‘squeeze the short’ and buy the stock — the price shot up from double digits on Thursday (January 21) to $480 on Thursday (January 28) last week.

Wall Street from home

So, instead of ‘occupy Wall Street’, the protests that took place few years ago, Main Street decided to take over Wall Street from home.

The market was shaken up. What started as a harmless online chat has now cost big investors billions in losses. Those who call the shots on Wall Street are being threatened, they are losing control. Will the youth take over the reins in the world’s biggest and richest stock market? Wall Street hit back, forcing most platforms to halt buying into GameStop, including Robinhood which claims to support the right of ‘the little people’ to trade.

The move to restrict the trading led to a backlash from many people, including prominent members of the US Congress who condemned Robinhood’s move to prevent people from buying into the stock. The Redditt crowd accused Robinhood of succumbing to Wall Street pressure, aimed at limiting the losses of big funds.

The US House Financial Services and Senate Banking committees said on Thursday they will hold hearings on the stock market after users of Robinhood and other trading apps were denied access.

“We’re done letting hedge fund billionaires treat the stock market like their personal playground, then taking their ball home as soon as they lose,” Representative Ro Khanna, a Democrat, said on Friday. He noted that hedge funds were allowed to continue trading stocks while individual investors were handicapped by trading limits on Robinhood.

Betraying its core users

The platform was forced to give people access to the stock on Friday and said that it “stands with the people who are making their voices heard through the markets, and showing the world that investing is for everyone, not just for the wealthy and not just the institutions.” But it was too late. It has betrayed its core users, those on the Redditt forum say.

The rebellion is a grand awakening, analyst say. For decades, billionaire investors made the calls on Wall Street, constantly changing the rules to suit them. They would decide which stock goes up and which one goes down. Small investors rarely made a decent profit in the market.

Republican Senator Ted Cruz told reporters that the market “seems to favour a handful of rich influential players at the expense of ordinary citizens and ordinary traders.”

The Wall Street elite has probably ignored the fact that we live in the digital age. Everybody has access to everything, including the US billionaires’ favourite game, the stock market.

Last week’s GameStop saga has of course led to the market’s volatility. The Dow Jones closed down by more than 550 points on Friday, one of its worst days since October. But that is temporary. The market will stabilise, but when it does, it will never be the same again.

There is a new player that defies the rules of the hedge funds and other big players. And that player wants a piece of the cake. But most importantly, Wall Street will be a more democratic institution after decades of rule by the rich and powerful.