After small investors organized online to squeeze billions of dollars from Wall Street hedge funds, some establishment actors have come out against the investors.
The investors, mainly organized on the online Reddit forum “r/WallStreetBets,” have been buying shares of the video game retailer GameStop en masse, in the hope that hedge funds that apparently have borrowed large quantities of the stock to “short” it will be forced to buy it back at exorbitant prices, in what’s dubbed a “short squeeze.”
Some media, pundits, politicians, and financiers have decried the GameStop rush as irresponsible market distortion and argued that authorities need to step in for the small investors’ own good.
“What is dangerous, amid this trading frenzy, is that retail investors have been chasing prices so far above any sane valuation and that many will end up nursing losses,” said Jack Inglis, head of the Alternative Investment Management Association (AIMA), a hedge fund association, in a letter to members who have managed $3.7 trillion as of the third quarter of 2020.
He said the organization will help regulators with investigations.
And for the hedge funds, “those exposed will have taken it on the chin and will have executed steps to contain losses for their clients, whose savings they manage,” he said.
William Galvin, Massachusetts’s top financial regulator, also advised an intervention.
“It calls upon the regulators ... to consider simply suspending it for a month and stop trading it,” he told Barron’s. “These small and unsophisticated investors are probably going to get hurt by this.”
The pushback reached such an extent that several online brokerages, such as Robinhood and Interactive Brokers, that were used by the small investors, halted purchases on Jan. 27–28 of GameStop and several other stocks that were also popular among the r/WallStreetBets crowd. Some of the restrictions have since been relaxed, allowing investors to buy at least a small quantity of the stock.
Interactive Brokers founder and chairman Thomas Peterffy, a billionaire himself, indicated that a full-blown short squeeze could make the shorts—stocks that have been borrowed and sold—so toxic as to spell financial ruin for anybody involved in the sale.
