Rohan Ghosh Choudhuri
Contributing Writer
Investment and Trading company Robinhood caused uproar over their decision to restrict trading on stocks such as Gamestop (GME) and AMC. Although this controversy has proven detrimental for certain political and economic interests, it represents a move towards further democratization of the stock market.
In late January, retail investors on the “wallstreetbets” sub-Reddit page used the thread to generate an artificial demand across the stock market. This artificial demand aimed to capitalize on the overaggressive ploy of hedge-funds, who shorted Gamestop stock in a record fashion. Shorting a stock is a market strategy executed when one borrows overvalued stock and immediately sells it, hoping to buy it back at a much cheaper price in the future to create profits.
According to Yahoo Finance, 68.13 million Gamestop shares were shorted by hedge funds in January, representing 90% of the outstanding Gamestop shares and totalling almost 1.5 billion USD in market value. By using social media, retail investors were able to generate enough buying power to increase the stock price by 30 times and execute a short squeeze, which transpires when large scale short sellers are forced to buy back their shorted stocks in large quantities in order to minimize their losses, even further driving the price upwards.
On January 28, however, Robinhood made a controversial decision to suspend the ability to buy Gamestop stock, forcibly eliminating the demand. As a result, the stock tumbled back down, causing millions of retail investors to lose their investments as well as any potential profits. The decision has since been labeled market manipulation and has led to multiple civil cases, where people have claimed it was an attempt to bail out large corporations on Wall Street who were suffering from over $20 billion in losses on GME alone. However, the restrictions were not enacted to minimize losses for large corporations on Wall Street; they were simply enacted to meet capital requirements set by financial regulatory bodies. Due to increasing publicity and activity on the app, Robinhood feared they would no longer have sufficient capital and funds to provide enough collateral to their regulators, which would in turn, jeopardize their business.
Although the listed economic and political repercussions are clearly disastrous, this controversy is a result of a democratized stock market, which should be celebrated. Prior to the democratization of the stock market, capital markets were exclusive to a small percentage of people who had the means to hire stockbrokers, pay investment fees, and understand the concept of trading stocks. However, since the creation of mutual funds, 401k plans, IRAs, and increasing developments in technology, the stock market has now become accessible to virtually anyone. The development of smartphones, web browsers, and stock trading applications such as Robinhood that let you buy even partial shares, have revolutionized the way stocks are traded.
Most recently, social media has been a significant step towards a more democratized stock market. As evident in this case, retail investors can use social media to easily reach billions of people, unlocking potential for limitless buying power. With billions of people on social media daily, Although social media was used as a method of communication in this case, it is also a hub for users to share their experience, knowledge, and strategies for trading stocks. This opens the door for practically anyone to become involved with the stock market.
Although the restrictions on trade had received significant backlash, the basis of the high activity on GME, AMC, and other stocks demonstrates the influence of social media on the capital markets. The current situation is a direct result of an evolving stock market, furthering democratization, which should be celebrated.
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