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Why Brokers Had To Restrain Trading in GameStop Shares
Users of the Reddit forum “r/wallstreetbets” encouraged individuals to bid up Gamestop’s (GME) and AMC’s stock price. Their actions caused a short squeeze on hedge funds who lost more than one billion in a single day. A short squeeze is when a heavily shorted stock suddenly increases in price like GME and AMC. The rise cause traders that are short to begin covering their stock or buy it back. Once traders do this, it further increases the demand and price of stock causing a momentum loop. Essentially, the Reddit crowd gathers more attention as investors misbehave and become greedy as they want in on the action for fear of missing out (FOMO).
The Robinhood app provides retail investors a “free trading” platform. There’s no such thing as a free lunch, and it appears that the Robinhood app and other brokers disabled trading for several stocks citing market volatility. From the mainstream media’s perspective, this hamstrung the retail investors, and rewarded the institutional investors, causing an uneven playing field. In a recent Wall Street Journal Opinion article, the reason had to do with minimizing their own financial and regulatory risk, not trying to bail out hedge funds. Regardless, their decision has enraged its userbase with notable political voices across both aisles like Alexandria Ocasio Cortez and Ted Cruz denouncing Robinhood’s actions.
So, What Can We Learn
There many lessons to be learned amidst all the confusion:
- What’s taken place with Reddit and Wall Street is NOT new.
- Market manipulation is wrong.
- Free trading & free markets are good and necessary.
- Both the Reddit users and the Hedge Fund owners were greedy.
- Short term momentum trades (if not traded properly) are essentially gambling and speculation.
- Speculation is NOT intelligent investing.
Greed Can Hurt You
Those who came late to the party are learning an aweful lesson in greed. As we warned in the video, Gamestop’s stock price has a 52-week high of $483, and now is trading at $66, or essentially -86% from its recent highs. This is not intelligent investing. If there is anything we can do to help you stay off the ledges of fear and greed, we’d love to have a cup of coffee or a quick phone call with you.
Intelligent Investing is a boutique wealth management firm serving high-net-worth individuals and families in Greenville, SC.