The GameStop Saga: How Reddit and Independent Investors Shook Wall Street
Over the past month, Wall Street has seen a startling surge in stock prices due to a rebellion from an improbable party of meme laden traders. One of the most affected stocks was GameStop (GME), a company made up of largely brick-and-mortar stores which has faced financial difficulty during the pandemic and the tremendous rise in online retailers. With a bleak outlook for 2021 and hundreds of locations closed, the company was entering the nostalgic ranks of Blockbuster and RadioShack.
Within two weeks of the new year, GameStop’s stock stood at a mere $13.85 per share, along with a steady decline in revenue. So how did a company worth $1.3 billion on the stock market on New Year’s Eve experience a meteoric rise to $21 billion by January 28th? The answer, simply put, is the internet.
Hiroko Masuike/The New York Times
A viral subreddit called r/wallstreetbets prompted an online media frenzy and a nearly $13 billion loss for short-selling hedge funds. Reddit, a community-based website, noticed a surge in users subscribing to the subreddit, which currently has over 9 million members. The online forum hosts individual traders, nonstop memes, and tips and analysis for trading.
After the co-founder of the pet-supply site Chewy, Ryan Cohen, acquired a 12.9% stake in the company last year, GME gained the attention of traders on Reddit and the social media service discord. The user Keith Patrick Gill, posted about his stocks in the company, inspiring other amateur investors to join the furious momentum that quickly morphed into a rebellion against Wall Street.
Large hedge fund investors shorted GME’s stock and bet on its failure, by staking their financial positions on the belief that the stock would continue to decrease and earn them a profit. According to the Wall Street Journal, Melvin Capital, a prominent firm that bet against GameStop, lost 53% of its investments in January, accounting for a loss of over $3 billion. Andrew Ross Sorkin, a financial columnist for the New York Times, explained it as a “Total freak out. Total Shock. Total confusion. Total consternation. A sense of what is happening here. This is Alice in Wonderland.”
While some subreddit users want to squeeze large hedge funds like Melvin Capital out of billions, others are simply riding the wave of r/wallstreetbets and taking their shot at amateur investing through Robinhood, a stock investing app for users over the age of 18.
Robinhood allows people with small amounts of money to buy fractions of shares in a large company. Their goal is to democratize investing and allow investors to trade stock without paying a fee. This makes investing feel more like a past time rather than high stakes betting. Yet, Robinhood has raised controversy among regulators. The SEC charged Robinhood $65 million in December 2020 for misleading customers about revenue sources and providing inferior trading prices to its users.
Robinhood essentially routes trades through brokerages that pay to make those trades. Then big market-makers pay millions to process the trades and return them to the market. The SEC report claims that “Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars.”
Even so, past controversies did not stop Reddit users from flocking to the app after Gill sparked a frenzy over driving up GameStop’s stock. On December 31st, 2020, GME’s stock stood at a mere $18.84, rising to nearly $40 by January 20th. The stock then exploded to $347.51 on January 27th, reaching a market high of $483 the following day. The 2,463% increase is credited to Reddit users encouraging each other to “hold the line” as well as publicity from celebrities like Elon Musk, who tweeted “Gamestonk!!” on January 26th, with a link to the subreddit.
Those participating in “meme stock” voiced their affection for the company on r/wallstreetbets, with one user saying “Not only do I believe in GME, but I believe they have the ability to become the Williams-Sonoma of gaming. This whole GME experience has awakened something in me.”
Alexis Ohanian, co-founder of Reddit, went to Instagram live on January 27th to comment, saying that Robinhood has allowed users to essentially “meme a company into existence.” If online users have the power to organize a massive upsurge against a well-established market, the financial distrust in the American Public may be rising as well.
The swell in Robinhood trading caused the site to cease all buying of GME Stock on January 28th, as prices reached a high ceiling. This sparked debate over the possibility of regulators and stock exchangers taking control of the rapid ascension of stock prices. But, according to Robinhood CEO Vlad Tenev, Robinhood was worried about running out of money and was unable to continue funding the velocity of trade that shook the app over the course of a few weeks.
Political figures also weighed in on the controversy, including Congresswomen Alexandria Ocasio-Cortez (D-NY), who called their actions “unacceptable,” saying that “we now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” Robinhood addressed concerns and reported their intent to raise $1 billion from investors to reopen trading for limited securities. But, as of February 14th, GME has significantly decreased to $50.75 per share.
In response to these events, The U.S House Committee on Financial Services had a virtual hearing on February 18th to discuss GME’s market volatility. Tenev, Gill, and Gabriel Plotkin, CEO of Melvin Capital Management, were among the five witnesses to testify on the collision between short sellers and retail investors. The hearing focused on Robinhood’s payment for order flow, in which stockbrokers get a kickback for selling the ability to execute trades. Congresswomen Alexandria Ocasio-Cortez (D-NY) asked if Tenev would be “willing to commit today to voluntarily pass on the proceeds of the payment for order flow to Robinhood customers,'' in which he responded saying that Robinhood is a “for-profit business and needs to generate some revenue to pay for the costs of running this business.”
After consistent question avoidance and heated rebukes during the hearing, Representative Maxine Waters (D-CA), the chair of the House Financial Services Committee, announced two new future hearings that will help them “determine potential legislative steps to protect investors and ensure Wall Street accountability.”
But as stock prices begin to fall back to earth, not everyone has made a safe landing. While some Robinhood users experienced unexpected wealth, other investors quickly lost value as stock prices leveled out. The aggressive maneuvers employed in the GME squeeze illuminate the organizing power of online communities and the ripple effect one fervent Reddit user can leverage.
The momentous trading high has since petered out, and it’s unlikely that we’ll see another historical rise in today’s highly adaptable markets. But the long-term effects may enlighten a new era of retail investors as the accessibility of mobile phone trading apps shifts control to young influencers, who are emblematic of the social media age’s herd mentality.
But what we’ve really learned through the “meme stock mania,” is that if enough people collectively agree that something is worth $30 billion, who’s to change their minds.