Here's How Young Amateur Traders Are Beating Institutional Investors at Their Own Game

Roshan Pandey

The author takes full credit and responsibility for the views presented in this article. 

Generally, institutional investors manipulate the share price using the 'Pump and Dump Scheme' which means they either intentionally raise the price of any stock by buying it in bulk and selling at a higher price (like Harshad Mehat or the Bull gang in Scam 1992). This is known as market cornering. Or, they initially sell the stock of a company in bulk, causing a snowball effect of panic selling. They then buy the same stock at a low price (like Manu Mundra/ Bear Gang in Scam 1992). This practice is called short selling.

Similar to the case of the Mehta Scam in 1990, Wall Street (New York Stock Exchange) today is passing through the same stage. We are observing a war between the Bull cartel and the Bear cartel.

Today in Wall Street:

Bull cartel: Reddit (wallstreetbets), the Twitter Community, and Robinhood Traders
Bear cartel: Institutional Investors/ Hedge Funds (like Citron Capital, Melvin Capital, etc.)

The reason behind the initial rise ($20 to $40):

On January 11, Gamestop Corp. announced it had added three new directors to its board, including 'Chewy' (e-commerce company) co-founder 'Ryan Cohen' who brought the digital experience to the table, something the GameStop desperately needs. Only due to the Cohen involvement in the board committee, optimism wide-spread, and the stock price surge from $20 to $40 (almost +100% within a day).

The reason behind further rise ($40 to $350):

After a sudden surge in stock price, the next day, institutional investors started short selling in bulk quantity (at around $40 per unit) and the price declined to $30 per unit.

Reddit community-based traders group called 'WallstreetBets' noticed this short selling and decided to stand against short-seller moves. All the group traders united and started buying stock in bulk, holding their positions. They even requested others to buy it (via Reddit and Twitter) to support their strikes against the short-sellers.

This resulted in a low supply as retail traders held on to their positions tightly and caused high demand from the short-sellers (as they were forced to square off their positions). By heavily buying the shorted stocks in bulk, the short sellers i.e institutional investors then themselves caused the price to soar further.

On the very first day of trading (Jan 04) of 2021, the stock price of the company was $18.38 and on Jan 30, it was at $325. The stock price thus gained about 1,700% in less than 30 trading days.

Doomsday for the short-sellers

Among the short-sellers, Citron Capital is also one that shorted the stock at $40 per unit and waited to buy it back at $20, hoping to make a gain of about 100%. But eventually, they exited at a loss of about 100%, implying it bought back the shares at around $80. Now the Redditors are waiting for the day when hedge funds will kneel down pay the price as the retailers wish. From some sources, it has also been known that these Bull cartel has fixed their positions to sell at $5000 per unit.

Sleeping must be the hardest thing these days for short-sellers because of their surmounting daily losses. What makes all this more interesting is that these big players have fallen into their own trap (where they wanted to trap small players/ traders) and now retail traders are compelling institutional traders to dig their own grave more even deeper.

Many investors like Champath Palihapitiya, Jordan Belfort, Robert Kiyosaki, Michael Burry, Elon Musk, etc. are allegedly fueling the situations with their tweets and responses.

As the situation is being more complicated day by day, many trading platforms, Robinhood included, have halted the trading of Gamestop stock. Robinhood is a popular investment platform for retail traders. Some are of the opinion that this is so much for a "free" market: artificially curbing demand by depriving retail investors of buying.

The Securities and Exchange Commission (SEC) also said in a statement that it is closely monitoring the extreme price volatility of certain stocks in recent days and that it stands ready to take aggressive enforcement action if market manipulation is found to have taken place.

There is nothing illegal in short squeezing. And there is nothing illegal in going long. The SEC may, however, take action against a group of investors persuading each other to keep buying, or for the short sellers, keep selling. Everybody is innocent unless they're proved guilty. Anyways, let's see how the market will react in the coming days!

Article by Roshan Pandey