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How unconventional trading led to turmoil on Wall Street

In late January, a handful of unlikely Wall Street stocks began skyrocketing in value, which has led to big market volatility. The spike was driven by an unconventional group of traders who had banded together on a buying spree, determined to take on the market. Paul Solman reports as part of our economic series, "Making Sense."

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  • Judy Woodruff:

    In late January, a handful of unlikely Wall Street stocks began to skyrocket in value. It's led to big market volatility, and that will be the subject of a special meeting tomorrow with Treasury Secretary Janet Yellen and other government regulators.

    As Paul Solman reports, the spike in these stocks was driven by an unconventional group of traders who banded together on a buying spree, determined to take on the market for their own reasons.

    It's the latest in our economic series Making Sense.

  • Paul Solman:

    The frenzy:

  • Man:

    Obviously, this thesis is based largely on the fundamentals.

  • Paul Solman:

    Internet chatters hyping and buying stock in seemingly moribund companies.

  • Man:

    And you're right, it doesn't make any sense at all.

  • Paul Solman:

    AMC, Bed Bath & Beyond and, above all, GameStop. Crazy?

  • J.J. Buckner:

    And we're not as dumb as everyone thinks we are. We know what we're looking for.

  • Collin McLelland:

    It's the regular Joes vs. Wall Street.

  • Paul Solman:

    Joe is using the free app Robinhood to buy GameStop, a money-losing, brick-and-mortar monger of video game discs that seems obsolete now that games are bought and downloaded online.

    And yet the stock skyrocketed last month.

    We're going to try to explain what's been happening with Alex Imas from the University of Chicago Business School and my grandson, Joe Viola, 17.

    So, Alex, set the scene for us. What's been going on?

  • Alex Imas:

    There's people on this platform called Reddit who decided to buy up a lot of this stock, a lot of shares, partly because hedge funds on Wall Street started short selling it.

  • Paul Solman:

    OK.

    Before we get into that, Joe, so, I remember taking you to GameStop when you were younger to buy you video games. Has kind of nostalgic appeal?

  • Joe Viola:

    Absolutely.

    And I think a lot of people my age and a little bit older grew up with GameStop. And I'm seeing a lot of people on these platforms, such as Reddit, who are saying, buy, buy, buy GameStop, for two reasons, one, to make money, and the other to stick it to the rich elite of the hedge funds.

  • Paul Solman:

    The hedge funds that have been betting against retro GameStop by shorting its stock, that is.

    Now, in keeping with the retro theme, Alex suggested a retro product to visualize short selling.

    So, here I have got an iPod, which I scrounged from somewhere in my basement.

  • Alex Imas:

    Right. So, an iPod's kind of like GameStop. It was very popular in the 2000s, and it's a bit obsolete, because everybody's got music on their cell phones.

  • Paul Solman:

    So, how do you short sell an iPod?

  • Alex Imas:

    So, let's say I'm a hedge fund and I think that the iPod is worth less than what it's being currently sold for.

    I go to you, Paul, and I say, can I borrow your iPod? So, what I do is, I sell the iPod that I just borrowed from you, and then buy it back for the future price. So, if the price goes down, I make money, because I'm basically getting the difference between that.

  • Paul Solman:

    You just want me to lend it to you?

  • Alex Imas:

    I'm going to borrow your iPod, and I promise I'm going to give you a little bit extra money whenever I return it.

  • Paul Solman:

    And to promise, contractually, to return my iPod by a certain date, or whenever I ask for it back.

    So, now you get wind of this short selling, Joe, and what do you do?

  • Joe Viola:

    Oh, OK, I grew up with this product. It's got a certain nostalgic value. I'm going to tell lots of my friends on social media, maybe Reddit, to go out and buy iPods, so we can all get in on the trend.

  • Paul Solman:

    What happens to, the hedge fund, Alex?

  • Alex Imas:

    So, because I am betting that the price is actually going to go down in the future, if it ends up going up, I end up losing money, because I have to buy it for more than what I sold it for initially.

  • Paul Solman:

    And, as you buy it, you're driving up the price even higher.

  • Alex Imas:

    Exactly.

  • Paul Solman:

    And that's what's happened with GameStop, $18 a share just last month. My grandson bought one share last Wednesday. And at what price?

  • Alex Imas:

    Two hundred and ninety-three dollars.

  • Paul Solman:

    I want to point out that I did not advise on this trade.

  • Joe Viola:

    I'm thinking that, as more people are saying on social media that they're going to buy, the value is going to go extremely high. As well as that, I want to continue to stick it to the man, these people on Wall Street who have been running everything.

  • Paul Solman:

    And sure enough, out on the street:

  • Man:

    I think it's great that rich people are losing money, because capitalism is destroying this world.

  • Man:

    I look at the whole GameStop thing with the stocks as a revenge of the nerds kind of attack.

  • Alex Imas:

    This is one of the most complex attempts to coordinate on a single strategy that I think we have ever seen.

  • Paul Solman:

    A sort of people's hedge fund, says Imas, coordinating on the Reddit forum WallStreetBets, urging one another to buy, with rocket ship emojis.

  • Alex Imas:

    Which is to say, look, this asset is going to keep going up, so everybody should buy.

  • Paul Solman:

    And to hold with diamond hands.

  • Alex Imas:

    We are not going to break. We are going to keep the price up.

  • Paul Solman:

    And there's even a buy-and-hold sea shanty.

  • Man (singing):

    With diamond hands, they knew they'd profit if they could only hold.

  • Paul Solman:

    But hold on. Most Wall Street hedge funds aren't short sellers. They bet on stocks going up. And in this case, some hedge funds have actually profited hugely from the so-called revenge of the nerds, as have Robinhood's paying customers, big investors, many of them hedge funds, who buy information from Robinhood about what people there are trading.

    As for short sellers, are they bad actors? Sure, they bet against apparent losers like GameStop, but also against frauds, like the infamous Enron, which short sellers helped take down nearly 20 years ago by exposing its phony accounting. Financial analyst James Early:

  • James Early:

    Short sellers, they find the bad stuff, the dirty stuff, the frauds, the scams. They protect investors.

  • Paul Solman:

    Which brings us back to the Reddit flash mob.

  • Man (singing):

    One day, when the trading is done, we will take our gains and go.

  • Paul Solman:

    Yes, they successfully ran up GameStop's stock price, which squeezed the short sellers.

  • Alex Imas:

    But this is also incredibly risky, because people in the community can start selling GameStop because, for example, they think it's overvalued, and the price is going to start going way down, and the people who bought at the height of this thing are going to end up holding the bag.

  • Paul Solman:

    This past weekend, I put two last questions to grandson Joe, until GameStop, a remarkably savvy investor.

    When are you going to get out?

  • Joe Viola:

    I was initially going to get out at $1,000 a share. However, I have revised it to $400 a share, after it hasn't soared as much, as quickly as I thought it would.

  • Paul Solman:

    Two ninety-three is what you spent. Let's say it goes back to $18 a share. How are you going to feel?

  • Joe Viola:

    I'm going to be honest with you. I will be pretty disappointed. However, I'll also be fairly happy that I was able to partake in such a historical time in investing and was able to be a part of this movement to stick

  • Paul Solman:

    This afternoon, GameStop closed at $93.

    For the "PBS NewsHour," Paul Solman.

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