In what could have been a relatively quiet post-inauguration week, a breathtaking story of David vs. Goliath played out on the world stage, turning financial markets upside down and wreaking havoc on Wall Street.
But let’s start from the beginning. Earlier this month, activist investor Ryan Cohen, founder of Chewy.com, joined the board of video game retailer GameStop along with two former Chewy colleagues. Cohen, GameStop’s second-largest shareholder, had long been pushing for a transformation of the struggling brick-and-mortar retailer, which is why his addition to the board fueled hopes of better times to come. GameStop’s stock rallied, forcing short-sellers, who had bet against the retailer, to cover their positions and buy more GameStop shares.
A few days later, after things had calmed down a bit, users on the Reddit board r/wallstreetbets noted that GameStop stock was still heavily-shorted and decided to buy up shares of the company to further drive up the price and force the hand of short-sellers. Word spread quickly and GameStop’s share price exploded over the next few days, as individual investors drove up the price enough for mighty hedge funds to abandon their positions and lose billions of dollars. By Wednesday, January 27, the stock had gained more than 700 percent over the course of four trading days, while the savvy redditors started targeting other heavily-shorted stocks.
Later that week, after calls for help from Wall Street had grown louder, several online brokers used by retail investors blocked the trade of the affected stocks, allowing users only to sell their shares, which subsequently tumbled. After a public outcry, several brokers, most prominently Robinhood, reversed their decision after market close on Thursday, announcing that they’ll allow limited trade of the targeted companies on Friday, prompting another jump in GameStop's share price.
Throughout the last week, the inevitable happened, however, as GameStop's shares, which had briefly been "to the moon" as the Redditors had intended, came crashing back to earth. Despite calls to hold on to their shares, many must have found it too tempting to cash out of their investment, saving their gains before it would be too late. With GameStop's share price now back to roughly the same level it was at before the Reddit saga unfolded, it seems likely that many investors that were a bit late to the party got burned in the process.