Last week, the art of day trading possibly changed forever after an organised fight back against the Wall street hedge funds. News broke that hedge funds were short-selling a brick-and-mortar video game store—betting on the stock price to go down—and amateur traders decided to band together to do something about it.

Fighting for the Little Man

Some background information is required to understand what really kicked this off. 

Short selling is when traders borrow stock and must return it by a set date. If the stock reduces in value then the trader can replace what they borrowed with a smaller purchase. On the other hand, if the price rises then the stock will be more expensive to replace. 

What really annoys amateur day traders is that when hedge funds release news that they have shorted a particular company this encourages others to follow suit. Hedge funds have this power by virtue of the size of their trades, and the amateurs have had enough!

Outrage

Anybody that hasn’t seen the power of social media must live under a rock. It is the most powerful medium for the exchange of information that the world has ever seen. One such medium is the forum Reddit. Here amateur traders exchange information on stock tips and general advice from the world of finance. 

Earlier this week news broke that the hedge funds were betting billions of dollars on the price of GameStop. This isn’t a particularly surprising piece of news as in the modern world gamer tend to download the games, rather than visiting a store to pick up a DVD copy. Regardless of the news that a new management team was in place, a company with this mission plan just doesn’t fit into the modern day.

The amateur traders discussing their strategy on Reddit didn’t seem to care—they had simply had enough of the bigwigs in finance shoving the little man around and decided to do something about it.

If the share price would drop when news of hedge funds betting against the company hit the headlines then buying the stock en masse stood a good chance of sticking it to the hedge funds and potentially stinging them for billions of dollars.

This is exactly what happened. The share price of GameStop ended up rising to 700% of its original value. 

Some readers might be thinking that this is a perfectly normal sequence of events, but not everybody thought so. Brokerage firm Robin Hood, along with some others, wasn’t happy with the savage price movements and restricted the purchase of GameStop stock. Of course this sent the amateur investors into a frenzy who then saw the share price plummeting down by a whopping 55%.

Lawsuits

It didn’t take long before traders were threatening a class action lawsuit on the firms they were accusing of artificially manipulating the markets. Conspiracy theories were now flying around and the whole pantomime was even being covered by the mainstream media and the likes of political commentator Ben Shapiro. 

Google was forced into getting involved after no less than 100,000 negative reviews were posted against Robin Hood. They claimed that these were not genuine and as such would be removed.

This whole affair now even has politicians sitting up and taking notice.

Alexandria Ocasio-Cortez and Ted Cruz were discussing on Twitter that this needed further analysis to prevent a similar occurrence in the future.

Is it Legal?

While it is heart-warming to see the little man get one over on the bankers, there are a lot of questions to be answered on this matter. For starters, is it legal?

Wall Street traders are forbidden from getting involved in what is known as a “pump and dump”. This is the talking up of a stock in public with the intention of encouraging investors to buy which increases the price. The traders can then sell at an artificial price to make a profit. This is highly illegal.

One man who knows all about this scam is Jordan Belfort—AKA The Wolf of Wall Street. Belfort is being approached by the mainstream media to appear on their news programs to explain exactly what is going on, and it looks like he is enjoying what he is seeing.

As much as he likes to see the amateurs getting one over on Wall Street, he does say this strategy is of questionable legality. While it is highly unlikely that any of the Reddit forum members will ever get into trouble over the banding together to raise a share price, it probably is illegal. 

The next few weeks will be interesting for traders as this story plays out. It is not only GameStop that is being targeted by the hedge funds but even huge firms such as Blackberry. Will the politicians put a stop to brokers being able to restrict the purchase of a particular stock or will everything just go stay as it currently is and this ends up being a one off.