Hedge Funds Lose Billions in Stocks Controversy
Xera Britt, staff writer
The stock market plays an important role in US society, but many laypeople do not engage with it in the public eye. This trend was uprooted last week when a controversy broke out between Wall Street Investors and the people of Reddit.
The source of this controversy is r/WallStreetBets, a Reddit forum that is significantly invested in the stock market game and is made up of casual investors.
According to Polygon, the subreddit began to notice that big hedge funds were enacting a tactic known as short-selling on the GME (Gamestop) stock. The retail investors on the subreddit retaliated by buying up stock en masse and refusing to sell.
Many on social media have been offering simplified examples of short-selling in order to help clarify the situation. The most common example seems to be the “Apes and Snakes” analogy. @tashitsenkyap on Twitter explains it as follows:
“Hypothetically, 5 bananas cost $10 total and an ape owns 5 bananas. A snake asks to borrow them, but instead sells them thinking the price will go down. If this is correct, the snake will buy back the bananas at a smaller price and make a profit while still returning the bananas back to the ape.”
The paraphrased example says that the “snakes,” or hedge funds, do not own “the bananas,” or stock, and are selling them in hopes that prices go down, then buying stocks back and ideally making a profit. The snakes must buy back the bananas; they cannot refuse since the stock was only borrowed. This is where r/WallStreetBets comes in, buys all the stock, and hikes the price up exponentially and becomes the only people that the “snakes” can buy all that stock back from. In alignment with the analogy, many of these individual investors are repeating one mantra: “Apes Together Strong.”
While speculation circulated online about the legality of the situation and the potential consequences to Wall Street, there has already been major backlash directed at major investing outlets.
The investing app Robinhood received a class-action lawsuit on Jan. 28. According to The Hill, the app “purposefully, willfully, and knowingly remov[ed] the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise [and] thereby deprived retail investors of the ability to invest in the open-market and manipulat[ed] the open-market.”
This situation has attracted the attention of the White House, who has publicly stated that it will “monitor” the situation. Meanwhile, the two hedge funds banking on the maneuver are trying to recover from the around $2.7 billion sum that they lost.