Analysis

How A Rabble Of Anonymous Redditors Stuck A Thumb In Wall Street’s Eye

(Photo by Michael M. Santiago/Getty Images)

Dylan Housman General Assignment & Analysis Reporter
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Brick-and-mortar video game retailer GameStop has seen its stock price skyrocket by more than 600% in the span of a week, and it’s been driven by amateur investors chatting and sharing memes online, not big Wall Street investors. 

GameStop, thought by some to be an out-of-date retailer in a market increasingly dominated by digital downloading of games, saw its shares close at a price of around $43 Thursday, Jan. 21. When the market closed 24 hours later, it was up to about $65; in the following days, online investors led by the subreddit known as “WallStreetBets” (WSB) drove the price north of $330

WSB is a community of more than 3 million Reddit users who are known for high-risk gambles and memes, like losing $50,000 in borrowed money on Apple puts and praising Tesla founder Elon Musk as a type of deity. The subreddit is generally comedic in nature, filled with inside jokes about its users’ lack of knowledge and the reckless risk-tolerance displayed regularly on its front page. 

The group of millions of retail investors doesn’t just exist for jokes, though — and Wall Street is finding that out the hard way in the GameStop case. (RELATED: Biden Administration Is ‘Monitoring’ Gamestop Stock Trading, White House Says)

A number of institutional investors and hedge funds had spent billions “shorting” GameStop’s stock, due to the company’s struggles to survive as the “Blockbuster of video games.” In the simplest possible terms, shorting a stock means betting that the price will go down. GameStop is the 12th-largest U.S. equity short on the market at time of publication, according to Investopedia. 

When someone shorts a stock, they have to borrow the shares from an entity like an investment bank. They then sell those shares at the current price, and buy them back at a later date to return to the lender. That second part of the process is known as “covering.” If the price goes down during the time between those two transactions, the short seller will profit the difference. If the price goes up, though, the short seller loses when they finally have to “cover” and buy back their shares. 

This is what WSB is doing to Wall Street. When this happens in large quantities at a rapid pace, it’s known as a “short squeeze.” Eight days ago, Reddit user “gardeeon” pointed out that there were more shares of GameStop shorted than there were actually available on the market.

This is when WSB users began their short squeeze: They began rapidly buying up shares, driving the stock price up, forcing the hedge funds and billionaires who shorted GameStop to “cover” their shorts before they lost even more, which drove the price up even further. A decentralized group worked together to take advantage of Wall Street and made hundreds, thousands, and even some of them, millions of dollars

Short sellers on Wall Street have lost more than $5 billion due to the squeeze so far, according to CNBC, including more than $2.5 billion in just the span from Friday, Jan. 22 to Monday, Jan. 25 alone. The hardest-hit is thought to be hedge fund Melvin Capital, which had $3 billion of cash infused into it by other hedge funds after taking unknown losses during the short, CNBC reported. (RELATED: Twitter Stock Plummets After Banning President Trump, Purging Conservative Accounts)

“It’s important for regulators to understand that manipulation is manipulation whether it’s happening through a new technology medium or it’s happening through traditional mail,” NASDAQ CEO Adena Friedman told CNBC.

“These are stock traders conspiring to manipulate the markets in open view of us all and using the ‘nah, its [sic] for the lulz, and the other side sucks’ as an excuse,” wrote Marketwatch tech editor Jeremy C. Owens.

“They’re not even trying to mask this as investing,” William and Mary economics lecturer Peter Atwater told The Dispatch. “This is pure gambling.”

Others see it as a populist uprising against big banks and billionaires. “It’s not my job to go and defend a bunch of highly compensated hedge fund managers against losses. Just the fact that for one time those folks lost, we can bellyache and cry on national TV, to me, is a joke,” said Social Capital CEO Chamath Palihapitiya

As Reddit user “Flexinzack” put it: “For all the big f*cking hedge funds monitoring us, this is a message from us to you, we f*cking own you now. F*ck. You.”