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American News Jan 27, 2021 6:44 PM EST

Reddit-fueled stock gains leave large investors angry—Biden administration monitoring situation

The Biden administration is "monitoring the situation" around GameStop and other stocks closely, with spokesperson Jen Psaki noting that the Biden administration has the first female treasury secretary who is on the case.

Reddit-fueled stock gains leave large investors angry—Biden administration monitoring situation
Noah David Alter Toronto

This article was published more than 1 year ago, information might not be up to date.

Users of the subreddit r/wallstreetbets have mass-betted on stocks in GameStop and AMC Entertainment Holdings, causing their stocks to skyrocket in a move that has left larger investors who were shorting the company's stocks disgruntled.

The Biden administration is "monitoring the situation" around GameStop and other stocks closely.

Reddit is an online internet community where users can create their own boards known as "subreddits." These subreddits cover a range of topics from politics to TV shows to investments, the latter category being what r/wallstreetbets falls in to.

The surge in the prices of the two stocks originated with Reddit users realizing that GameStop, which was trading at a low price, was being shorted by more than 100 percent, meaning investors were betting more short calls than there are stocks in the company. Essentially, investors were betting that the company would lose rather than gain value.

Redditors took note of this unusual situation, with users of the r/wallstreetbets subreddit deciding to collectively invest large amounts of money into GameStop.

The betting game was simple. A large number of individual traders buying up stocks in GameStop would fuel a large rise in stock price, leaving the larger investors who were shorting the stock with two options.

They could double-down on shorting the stock, hoping that it would eventually fall below its initial price. Alternatively, investors could cut their losses, which could further fuel price increases and make the price surge an even bigger victory for the Redditors.

The Reddit-fueled price increase of GameStop stocks have since skyrocketed the price from a mere $18.84 on New Years' to its current price of $302.35, an increase of over 1500 percent in less than one month.

The stock surge, however, has left a lot of large-scale investors angry, with many demanding state or institutional intervention to protect their assets. It has been estimated that traders have lost up to $5 billion from the price surge. One hedge fund, Melvin Capital Management, has already cut their losses on GameStop shorts.

The NASDAQ has already threatened to cease stock trading in companies which experience large spikes in online chatter.

NASDAQ CEO Adena Friedman took to CNBC to condemn the Redditors as "manipulators" and called for more regulation. Her interviewer, Joe Squawk, also suggested that this may be another reason why social media needs more government regulation.

TD Ameritrade described the stock surge as "unprecedented" and said that it is putting in place restrictions on trading stocks in both GameStop and AMC Entertainment.

"You have these media-driven platforms where the media isn't controlled by the institutions in the way that it has historically been. It's really a sign that the institutions are losing some control," said Richard Smith, the CEO of the Foundation for the Study of Cycles.

While most users are seeking to make quick gains by beating Wall Street, others have taken up the GameStop stock trading as an anti-establishment statement. The victory of Redditors over the big guys at Wall Street has displayed the power of virality over the traditional professional analysis seen on Wall Street.

"When you are able to feel like you're a rebel going against the establishment, that's a very powerful emotion," said Smith.

"You read the language on the message board, it's very 'us against them.' That's so powerful."

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