How are Redditors profiting off the stock market?

A tale of the gamification of Wall Street.

by Ryan White
|
27 January 2021, 3:09pm

How did a Reddit forum push share prices of a video game store sky high, upending Wall Street and the hedge fund investors that betted on its failure? Here is a brief explainer.

What is r/WallStreetBets (WSB)?

WSB is a subreddit of roughly two-million users who refer to themselves as “degenerates” and share news and advice about the stock market. It’s described as a predominantly millennial and Gen Z community, “Like 4chan found a Bloomberg Terminal”, in their own words. They’re kind of the cowboys of investing, disregarding the widely accepted stock market etiquette in favour of high risk disruption. They’re making headlines this week after turning their attention to a company called GameStop, messing with Wall Street by raising the price of its stocks by 480%, and costing traders potentially billions in losses.

What is GameStop?

GameStop is an American video game store that, while popular among gamers, has struggled to survive the great coronavirus retail apocalypse. Following the announcement of mass closures last year, shares could be bought for as little as $3.25 each. As a result, hedge funds began short-selling GameStop.

What is short-selling?

“Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference,” says Market Watch. “Many Wall Street fortunes have been made this way,” The Guardian writes, “but if the price doesn’t fall, the losses can be huge.”

It’s a nefarious but legal practise. (There was huge criticism of short sellers during the financial crisis of 2008.) According to Bloomberg: “Short sellers have been called a lot of things. Bloodsuckers. Parasites. Other words not fit to print. Now in the vortex engulfing GameStop Corp., they have a new name: the establishment.”

What happened this week?

Wall Street hedge funds, such as Citron Research and Melvin Capital, had shorted the stock of GameStop, “meaning they had bet against it and needed it to drop in price in order for their investments to be successful,” as per Buzzfeed News. Last week, Citron’s founder, Andrew Left, called GameStop an overpriced, “failing mall-based retailer” and then published a video in which he predicted that its stock will fall from its then current price of $40 down to $20, “But instead, the GME stock price rose even higher as redditors called on investors to put as much money into the company as they could.”

The WSB community has been encouraging each other to buy stocks in GameStop for some months now, especially since August last year, when Ryan Cohen – the founder of a pet food superstore that sold for $3.35 billion in 2017 – invested in it. But it seems Andrew’s comments further encouraged investment from Redditors. As the WSB forum is so large these days, it’s being viewed by some as a kind of uprising, mounting a challenge to the traditional investors who are, as they see it, damaging GameStop.

What does this mean?

As Amber Jamieson of BuzzFeed News writes: It’s “a reminder that stock markets are reliant on individuals, their feelings, and their actions.”

One man who isn’t happy about this is Scion Asset Management boss Michael Burry (played by Christian Bale in The Big Short, the docudrama about subprime mortgages and the housing market collapse). An architect of this situation, he drew attention to GameStop in 2019 after his company “unveiled a 3.3% stake in the beleaguered video-game retailer and urged the company to buy back shares,” according to Yahoo Finance. Yesterday he tweeted and then swiftly deleted the following: "If I put $GME on your radar, and you did well, I'm genuinely happy for you," he wrote. "However, what is going on now - there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous.”

Meanwhile Andrew Left has just provided an update, simultaneously offering all “you wonderful meme creators something to go ahead and meme,” which can be viewed below.

In short, it seems Andrew will be okay, he’s not broke. Phew. And while this has been a disruption, many are pointing out it could only happen to a relatively small company. Regardless, others still see this as a victory for the many, not the few. One guy even claims to have paid off his student debt with his bets.

In the words of Elon Musk who, as The Guardian writes, “has publicly battled with investors who’ve shorted his company and has a reputation for trolling behavior himself” -- “Gamestonk!!

Tagged:
Reddit