Even a week after its unusual soaring stock prices made headlines, GameStop stock continues to leap higher and higher. This bizarre turn of events has been explained at death, but for a quick recap: a number of overzealous investors took out aggressive short positions on GameStop, expecting a reliable return from the struggling company’s ill fortunes.
Instead, a throng of amateur investors on a subreddit called WallStreetBets pulled off an unimaginably ambitious short squeeze, investing in the stock at a high rate and causing the investors to suddenly need to cover their shorts. This led to some hedge funds losing millions of dollars overnight, as shorting has the potential for endless losses.
Is the System Broken?
Many who are skeptical about the markets have used this episode as an example of how easy it is for the markets to be contorted out of shape. Many Democratic lawmakers have for years called for tighter regulations on trading to make such wild swings in price less likely to occur. In this instance, mainly amateur traders profited, though there were also many professional investors involved in the squeeze.
However, as many progressives note, market regulations will typically protect the investments of amateur traders while limiting the excesses of the stock market. More conservative lawmakers tend to avoid levying such regulations, however, claiming that it’s a free market, and that investors should be allowed to compete with whatever advantages they happen to have.
Concerns over Trade Freezes
Apps popular with amateur traders, like RobinHood, have come under fire for freezing stocks like GameStop and AMC Theaters that have been targeted by WSB as “meme stocks”. Their moves have drawn attention from lawmakers, many of whom have questioned the legality of freezing stocks while they’re on the upswing.
The SEC finally commented on the situation, stating “[W]e will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws,” the board’s commissioners stated. “Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities.”
Some have identified the surge in stock as being typical of a “pump-and-dump” scheme. The end results, whether or not short sellers are involved, are that those who got in on the GameStop surge late are going to be transferring their money to those who got in early. There will almost assuredly be a crash of $GME, and, when it occurs, many people will be out their investments.