GameStop stock incident ultimately cost day traders says economist

U.S. & World

(WUTR-TV) — In January, a group of online traders decided to take back control of the stock market, GameStop in particular. Several multimillion-dollar investors were betting that its value would plummet, so using the social media platform Reddit, thousands of small-time day traders put in their money to bet against the Wall Street investors.

“Because there were a lot of Wall Street investors who didn’t think that GameStop was a good company, had weak, in a sense, fundamentals, weak profits, they were betting that the share price would fall,” said Michael Connolly, Assistant Professor, Colgate University. “So, they took the other side of that bet by betting that the price would rise and, in sense, in essence, cornered the market.”

GameStop increased from roughly 15 dollars to about 350 dollars a share, causing big investors on Wall Street to lose millions. But a few days later the stock came back to down to about 50 dollars.

“We saw this rapid increase in the price and then it fell because the fundamentals didn’t support GameStop being worth that much,” stated Connolly.

Because of this, the day traders ended up losing a lot of money.

“I can say not necessarily illegal, but it’s borderline that these apps allowed these investors to take really big bets,” explained Connolly. “So basically what they did was, they lent them money to then bet that the price will rise. And that is where a lot of people lost money.”

Connolly says the online group did what’s called a pump and dump scheme, where you buy the share price low, spread some rumors about it then try to sell it high, which is illegal. The hard part is proving it.

“To link what people were saying anonymously on Reddit with what they actually traded on,” added Connolly.

Connolly says legal action will depend on whether or not the federal government decides to pursue charges against the investors involved.

Copyright 2021 Nexstar Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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