SHORT SQUEEZE DEFINITION PROFESSIONALAs previously mentioned, this sort of strategy is normally used by professional investors, like hedge funds. You then buy it back for $2, return the pen to your friend, and keep the $3 difference. A simple example is this: you borrow your friend’s pen and sell it for $5. When the price does, in fact, decrease, the trader will buy back the borrowed stock in order to return it to the lender if it all goes according to plan, at the end of this cycle, the trader will have made money off the difference. Hoping she is correct, the trader waits until the stock begins to fall as predicted. Then, the trader sells the borrowed stock to investors willing to pay the market price. It begins when a trader borrows a stock, normally from a broker, she believes will decrease in value by a specific future date. For those unfamiliar, short selling is an advanced investment strategy usually used by experienced traders. This whole event started with the use of a common strategy called short selling. Because of the efforts of this band of small-time players, GameStop stock jumped from around $20 a share to almost $400 a share, or, in other words, it climbed as much as 1,650% in less than a month. This multi-billion-dollar short squeeze, a term explained below, began on r/WallStreetBets, the Reddit page responsible for the coordinated attack. While there were many reasons why these various individuals decided to join the movement, however, one important reason was to force themselves into an exclusive club traditionally run by hedge funds, in an attempt to beat the hedge funds at their own game. Once thought of as just a sort of chatroom for likeminded individuals, Reddit seems to have been re-introduced to the world as a way for the average joe to play the same game as a hedge fund CEO. From line cooks to salesmen to high school students, these “amateur traders” were brought together by a single platform: Reddit. Regardless of any ultimate legal conclusions, or lack thereof, however, this article will hopefully clear a layer of confusion related to the mechanics of what occurred and what regulatory watch dogs might do next.Īs a refresher, this story began when users on r/WallStreetBets, a Reddit forum, coordinated a massive movement to buy stock of specific struggling companies, including GameStop (GME), Blackberry (BB), and AMC (AMC). This article will take a brief look at those questions, unpack the legality of not only the moves of the investors involved but also the reactionary efforts of Wall Street players like Robinhood, and finally, highlight the legal developments already unfolding following the event. Regardless of how your awareness of the events came about, it is highly likely that reading headlines raised more questions than answers, especially with regards to the event’s legal implications. Perhaps you only know the event as that thing that happened to GameStop or perhaps, like me, you realized something was going on after receiving various emails from places where you hold accounts, like Robinhood or TD Ameritrade, attempting to dissuade worry about the market’s volatility and their role in the event’s fallout. By now, whether through social media memes or reputable news sources, you have probably read about the recent proletariat-like invasion of the retail investor on Wall Street.
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