Billion dollar hedge funds taken down by … nerds on Reddit?

January 29, 2021

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You heard that right. Small-time retail traders took on the establishment and won! But behind this David and Goliath story is an unfortunate reality for America: Our stock market system designed to win big on a failing economy.

That’s exactly what happened on Wednesday, Jan. 27, 2021. GameStop, a videogame consumer electronics, and gaming merchandize retailer, is a mere pawn. The real heart of this story lies with a group of smart but disillusioned small-time traders who never had a chance against hedge fund managers, until they figured it out. Since shorting a stock drives down its price until the company completely collapses, infusing cash into the stock will cause the price to sky rocket. And that’s what Redditors did.

Short positioning is betting money that companies and investors lose. They are literally taking the “free market” to the level of prop bets placed on coin flips at the super bowl. But it’s fully within the rules. And that’s where we get to hedge funds.

For years hedge funds have been literally hedging their bets by betting on both the success and failure of a company. Shorting stocks has routinely helped hedge funds to both not lose when companies fail, but also influence investor behavior to signal stop buying.

This double dipping is actually smart if it’s legal and you can get away with it. So what happens when the retail traders that are making steady middle class income decide that they too can impact market behavior if they thwart a hedge funds short sale strategy? The hedge funds are the ones left holding the bag.

And as you can imagine, the hedge funds are livid. They’ve lost billions, Melvin Capital is on the verge of bankruptcy. Stock trading apps like Robinhood and TD Ameritrade no longer are allowing the purchase of GameStop and AMC stock, only allowing investors to sell. This allows the stock to fail quicker so hedge fund managers can place a tourniquet on the gushing wound.

It is commonly thought the stock market is an indicator of a strong economy, not the strength of market manipulation rigging. Still, hats off (or in my case, turbans off) to these Redditors. They weren’t rich people taking to market rigging to secure obscene generational wealth. These are everyday Americans finally figuring out how to ‘count cards’ in the biggest casino known to man. And it really is a casino, Redditors who don’t cash out fast could also become part of the casualty.

America is the land of opportunity. That makes this tale of how hundreds of small-time retail traders on Reddit outsmarted hedge fund managers to the tune of $70 billion, a story as American as apple pie.

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