r/wallstreetbets vs. Melvin Capital and Wallstreet.
A David and Goliath Story
This is roughly what happened. A stock trading group that has a platform on Reddit noticed that a fund manager at Melvin Capital was shorting GameStop, Bed, Bath and Beyond, and a few other companies. It wasn't a typical short, it what is called a Naked Short, a type of trade used to manipulate the price and take profits. However, it's a high-risk trade. This trade wins when a lower price is achieved and loses if the price goes up. (that's the simple version)
The Reddit group has many internet trading group connections so they bought GameStop, told others to buy, and purposely created a trading situation called a Squeeze. So they bought, and they memed about it and bragged in chat rooms and others bought. And the price went up. Crypto folks bought, gamers bought, those who dislike Wall-street bought and the price of GameStop went up and up and up.
Consider it a digital "Occupy Wallstreet".
Other Hedge funds gave Melvin Capital some funds to try to help but even 2.7 Billion dollar liquidity investment didn't bail out Melvin's hedge. As of this moment, the price of GameStop continues to rise! It has nothing to do with the company as they had a struggling business model that was hard hit during lockdowns.
In any case, the leveraged loans come due on Friday and at this time it seems Melvin Capital will be insolvent when it does. They are already asking for a bailout and that has other hedge funds taking notice and wanting bailout money too.
I will be curious to see how this plays out in the media and how they make it out that it's not okay for little guys to manipulate the markets in the same ways the Hedge Funds do.
Stay tuned for interesting aftermath, where hedge funds ask the government to protect them from... regular traders. 🙂