Over the past month, GameStop, AMC, and various other stocks surged to extraordinary levels, largely due to a group of everyday people commonly called “retail investors,” who banded together on the subreddit “wallstreetbets” to buy specific heavily shorted stocks. When brokerage firms such as Robinhood, Webull, Interactive Brokers, and others ceased the buying of these particular securities, prices crashed, and retail investors suffered major losses.
Investors, the media, and even celebrities questioned the reasons for Robinhood for their decision to restrict stock buying.
Finance teacher Mr. Brian Long said, “We don’t really know for sure yet [why Robinhood restricted buying], but Robinhood’s stance is that it needed additional funds . . . in order to facilitate all these new trades, they needed collateral to basically back the trades if they failed or didn’t go through, and they didn’t have that collateral.”
Robinhood restricted trading of a handful of volatile securities on Thursday, January 28, and overnight they raised over 1 billion dollars for this needed collateral. Still, there are those who remain skeptical about Robinhood’s intentions.
“Some people think that perhaps [the brokerage firms] were trying to stifle the short squeeze to help out the hedge funds, which seems a little conspiratorial to me, but I don’t know,” Mr. Long said. “It will all come out when they do an investigation.”
The skepticism stems from Robinhood’s business model. Robinhood pioneered the concept of commission-free trading. Instead of charging commission fees for each trade, Robinhood relies on several other methods, one of which is selling order flow data to market makers.
According to a Bloomberg report, Robinhood makes over 40% of its revenue through this method.
One such market maker is Citadel Securities, a hedge fund that invested $2 billion to support Melvin Capital, another hedge fund that had a major short position in GameStop and was greatly damaged by the stock’s rally.
Naturally, this led many to suspect that Robinhood’s decision to stop trading was to allow the hedge funds to cover their losses at the expense of retail investors.
“I lost a little bit over $300 on AMC. It’s just classic market manipulation,” Fifth Former Asher Laackman said. “It shows how corrupt it is, that they can favor these big hedge funds at the expense of the ‘little guy.’”
Fifth Former Fisher Bond also lost money trading AMC.
“I think it was pretty horrible to not let these people [trade],” Bond said. “Wallstreetbets’ main fanbase, and these people who are putting all their money into GameStop and AMC are Robinhood investors who are beginner investors.”
Finance teacher Mr. Steven Patrylak said, “I think that there was a little bit of sympathy for the big hedge funds who had to borrow billions to cover their potential losses . . . I wouldn’t say collusion, but sympathy for the hedge funds [who] wanted to cut any further losses, and that will come out in the SEC investigations.”
Amid the stocks’ volatility, Wall Street Betters—some of whom were high school students—went along for the ride.
“My friend—he’s not much of an investment guy,” Sixth Former Maxim Kreider said, “but he’s a big Reddit guy. He got in [GameStop] at 20 bucks a share.”
“His portfolio at one point had $80,000 [of GameStop]. He held on [as the stock fell] and he ended up with about $12,000.”Maxim Kreider ’21
As the stock rose, Kreider’s friend was sitting on more money than is imaginable for a beginner high school retail trader. But as the stock started crashing on Thursday, January 28, the friend refused to sell.
“His portfolio at one point had $80,000 [of GameStop]. He held on [as the stock fell] and he ended up with about $12,000,” Kreider said.
The sentiment of “never selling” and “holding the line” was at the core of Wall Street Bets ideology and is likely what allowed the stocks to get as high as they did.
“I was skeptical, and I knew it was a bubble, but [my friend] was confident. I think subreddit was kind of an echo chamber, and people didn’t really look at the outside factors,” Kreider said. “Everyone was just saying ‘the stock’s going up, up, up.’”
Kreider believes there is a lesson to be learned for retail investors, but he still argues that Robinhood is at fault.
“It goes to show that if you’re in a bubble, you need to watch out and take your money out when you can and don’t stay in,” Kreider said. “But I think what Robinhood did was criminal. You look at Citadel, which is an affiliate of Melvin Capital and also Robinhood. I mean if that’s not massive collusion on a huge scale, I don’t know what is.”
Many assert the GameStop saga has shown that there must be more regulation.
“In the future, I think the SEC is at fault. They stood by and watched these hedge funds doing these things and shorting in irrational ways for many years,” Mr. Patrylak said. “I think it’s incumbent on the SEC to put an end to it, and I think they’re poised now to do just that.”
In the interconnected digital world, an increasing number of retail traders used social media to expose this side of Wall Street.
“A lot of our institutions haven’t caught up with what social media can do with regard to rallying human capital, if you will, so it will be interesting to see how it tries to catch up, without stifling free speech, freedom of expression, and all these other things,” Mr. Long said. “That push and pull is probably going to be something that plays out over the next five years or so.”
Furthermore, the growth of online brokerage firms has allowed retail investors to have a platform they did not previously have.
“Firms such as Robinhood and others have made trading stocks very glamorous. The small investor can now take positions that fifteen years ago were inconceivable,” Mr. Patrylak said. “Today the stock market is accessible to anybody who wants to be in it. Eliminating the need to have contact with a broker in-person, the elimination of fees, the elimination of commissions — all these barriers have been eliminated and made stocks much more appealing.”
“The evidence shows that the overwhelming majority of day traders lose money in the long-term.”Finance teacher Mr. Brian Long
The finance teachers hope students involved in the GameStop saga—and those who lost money—walk away understanding the risks associated with day trading.
“The evidence shows that the overwhelming majority of day traders lose money in the long-term,” Mr. Long said. “In a bull market, it’s a lot easier for people to feel like they know what’s going on, and they can make easy money because things are going up, but that’s not always the case . . . they might see some profits, but in the long-term, it almost never works out.”
“The money that you can make in a very short period of time is meaningless in the long-term, so it’s better to invest soundly than it is to invest in a risky manner,” Mr. Patrylak said. “It may be a lesson learned. A lot of kids don’t have a lot of money to lose, and the young will recover, so this lesson may serve them well for a long time.”