GameStop’s wild ride: how Redditors took on Wall Street

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GameStop was a heavily-shorted business by hedge funds.

The bet against GameStop was pretty aggressive.

You could affect the short squeeze here. You could push these hedge funds out.

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These are guys that are actively bankrupting companies to make money. We just totally gave them the middle finger.

The stock hits $483 which is mind-boggling.

This is really the most glaring example of how badly warped markets are.

The foundation of this story revolves around short selling.

Short selling is a way of betting against a company.

Let’s say a share costs $10 and I want to short the stock. I’m going to borrow that share for $10 and I’m going to sell it immediately at $10 and I’m going to hope that the stock is going to drop in value.

So if it drops to $5 they’ll buy back the stock, hand it back to the person they borrowed it from and pocket the difference. There are certain stocks that have attracted quite heavy short interest and that includes GameStop.

It’s this old video game retailer that has a lot of nostalgia for people who used to go to the mall with their parents, buy video games there.

At some point 138 per cent of its shares were shorted. Some more shares than were in issue were held in short positions.

For a lot of the hedge funds they had missed the opportunity to become an online retailer. Then the pandemic struck and there was no footfall.

There was a bet out there that this company was going to find it difficult to get out of the pandemic in good shape. But also, that companies like AMC Entertainment, which runs cinemas, was also going to have a difficult time. If the price of these shares starts to rise when you’ve got a bet on that they’re going to fall, you get in trouble quite quickly and you quite quickly get to the point where you’ve got to buy these shares back at a much higher price. You get squeezed out of that position.

The story of the game stop short squeeze actually starts before the short squeeze.

WallStreetBets is a Reddit message board. By far the most influential social media site in this whole episode.

Reddit users on WallStreetBets tend to be younger, they tend to be male, wary of authority, and kind of sceptical of institutions. So the short squeeze against major hedge funds was finding fertile ground.

We’ve seen short squeezes in the past, but they’re not generally predicated on retail investors.

There was a lot of buzz around GameStop already on the WallStreetBets forum, and people were talking about how it’s trading at less than it was worth.

They thought, once we got the momentum going it can really take off.

A few things have happened over the past 12 or 18 months that really souped this up.

We’re right before the forest fire, right? It’s ready to ignite.

The world locked down and there were all these investors who had extra money that they couldn’t spend.

We’re not going out. We’re not going to the cinema. We’re not eating out. We’re not going on holiday.

Now you could log into this Reddit community and immediately feel like you’re part of a movement.

It would be really hard to tell the story of what happened with GameStop without telling the story of Robinhood, which is a zero commission trading platform in the US that’s got a really slick app and it makes it really easy to trade.

It actually gamified it. And you don’t have to buy whole shares, you can just buy small sections of shares. Confetti goes up. It sort of makes the whole experience fun.

Little sprinkling of dynamite on all this. Retail investors had access to the options market, which hasn’t previously really been open to them. And that’s a way to really soup up your bets. So when you bring together the huge pot of people who are looking to dabble in markets, and the fact that it was really cheap to do, and the fact that you can play in options, and you can all talk about what your strategy is online, you have a real tinderbox.

To affect the short squeeze you’ve got to have a catalyst – something that will drive the share price up.

One of the co-founders of this online pet food retailer called Chewy was appointed to the GameStop board. That was seen as a sign that GameStop was going to become a more digital-forward business. And the day that Ryan Cohen was appointed to the board of GameStop, the share price rose 13 per cent. Then two days later it rose over 50 per cent. And then the next day it rose another 27 per cent.

The GameStop share movement was a bit like a rollercoaster.

This rollercoaster was like one of those one that actually shoots you right out the gate from the beginning and kind of just like shooting right up to the top.

Investors who had taken these long positions on GameStop started to post pictures of their investment gains.

My name is Michael Frawley. I’m 25 years old. I am a retail investor. I definitely do this part time. I got alerted to GameStop and AMC. I pretty much was on WallStreetBets every day. That first trade, I only put in $800 into GameStop with some calls. And literally an hour later I sold them for 10 times the value that I put in it.

It was actually a smart trade. Going back four or five monhs, there was actually a thread on Reddit that explained from a technical perspective, the float, short interest, the delta of call options that were out of the money. This was a great analysis. It was proven to be 100 per cent correct.

The story became about the rising momentum in the short squeeze.

Difficult to comprehend at the moment. You think, it’s a $1bn company. Should we be sending the entire markets desk to look at this? As the hours went by, you said, this is becoming a big story, that this will be front page news. And sure enough, the following week, every day it was.

There are a lot of sophisticated investors on WallStreetBets, and there are also a lot of people who are just there for a good meme.

And then there’s a layer on top of that is in it not just to make a bit of money, but that wants to stick it to the man. If I can take a hedge fund down in the process, if I can stick it to some billionaires, then that is the icing on the cake.

I don’t know that hedge funds are any worse than anybody else or lacks social utility more than any other market participant. The capital markets are a social utility. They are supposed to provide social utility because they are the lifeblood of our economies. They are supposed to allocate capital to businesses that are going to create value and hire workers. Everybody has the same motivation when they execute a trade. They are looking to make a profit, and that profit will come at somebody else’s expense. Trading is a zero-sum game.

Hey, this is Andrew Left at Citron Research, giving you five reasons why GameStop is going to $20.

One prominent short seller, Andrew Left, went on YouTube, he was kind of pounding the table this was a great short.

They were saying this thing is trading at $40. It should be trading at $20. This company’s in trouble.

You’re not going to change the story. You’re not going to change the underlying fundamentals of this company.

The crowd on Reddit went wild against him, right?

Everyone was talking about him. Everyone was talking about Citron. There are loads of like, stupid memes kicking around with people making videos with images of his face. And it became a real rallying cry – let’s take down these Citron guys.

You were seeing it go from $70 to $80 to $90.

GameStop – a tiny console’s retailer that most normal people had never heard of – it was the most actively traded stock in the States. It was bigger than Apple. That week had some of the heaviest trading volumes in the US stock market since 2008.

The audience of Wall Street has quadrupled in the five days around the GameStop rollercoaster.

I joined it when I was like 850,000 members and now it’s up to 8m, I think.

AMC, the cinema operator, their shares rose 800 per cent Nokia used to be incredibly popular little phone handsets. Now, not so much. Their shares rose 150 per cent. So there were shares like BlackBerry, there were shares like Bed Bath and Beyond. Shares that investors are not excited about started screaming higher. These are just companies that the sorts of people that congregate on Reddit feel really strongly about. They care about consoles retailers. They care about old school handset makers.

I also get dabbled in Blackberry as well as AMC. I think I put in $1,000 and I made $5,000 or $6,000 off of calls on AMC.

There was an announcement that Melvin had lost a lot of money. So that’s when it truly became we are sticking it to Melvin. Like this hedge fund has lost billions, and we’re going to see how far this stock can go. We’re going to keep trading it. This was a hedge fund that first month of the year half of their assets have disappeared and their performance has completely tanked.

They needed a bailout. And so Citadel and Point72, two other hedge funds, stepped in and provided billions of dollars.

The obvious comparison is David and Goliath.

This was David taking on Goliath in its purest form, at least in the early days. This was educated investors on the WallStreetBets forum. They said this is something that, once we get it going, we really can take down some of these hedge funds.

I mean, WallStreetBets is a platform that’s really defined by an irreverent sense of humour.

There’s definitely a little bit of machismo culture. They have their own language. Diamond hands, for example, which is basically about how many losses you can stomach.

There’s lots of talk of holding the line.

‘Hold the line’ was the rallying cry to keep people invested in GameStop. The price of GameStop could only stay as high as it was if people didn’t sell their positions.

That really motivated people to really buy shares and hold them.

You always hold onto the stock because you’re in it with your brothers. Of course, that goes against how markets work because someone has to sell and the stock price will go down.

The memification of investing on WallStreetBets was a really powerful tool for building momentum, spreading the message of this movement to investors beyond the platform. It became about being part of this movement that was a lot of fun during a time when fun was really thin on the ground.

Times are pretty bleak. It’s nice to have something optimistic to latch onto.

Shares in GameStop absolutely exploded higher.

The stock hits $483. It’s valuing this company at more than $20bn, which is mind-boggling.

This is when a lot of famous figures started to weigh in, notably Elon Musk, who tweeted, Gamestonk!

I also bought more GameStop calls. It was like the day before Elon Musk tweeted about it.

One of the hedge funds who actually gave an interview to the Wall Street Journal said that was their sign to sell. And they made millions on this trade.

I was trying not to get my hopes up, because I was like, OK, it’s pre-market right now, this can change very quickly. This is an unrealised gain. It’s not your money yet. You don’t know. It hit a high of like I think $124,000 and that’s when I pretty much sold.

GameStop shares from sort of mid-January right up to the peak, they rose 2,000 per cent. This is not normal.

Eventually, it dipped. It was an unexpected ride for a lot of people, and a lot of people threw up on the way.

The thing that got the move lower, that gave that momentum was that basically a few of the brokerages that are catering to these retail traders just started to creak at the seams. They couldn’t handle the scale of the trading in certain stocks.

I think the value could have easily gone to $1,000 if that had not happened. You could literally find the hour that Robinhood restricted trading on GME and AMC and all these other ones. You can see it right as the chart goes completely down – like 40 per cent within an hour.

Robinhood’s narrative has always been that it is this anti-establishment vehicle for allowing people to invest. And so when it started acting like a regulated established broker its investors were frustrated.

They finally got beat at their own game. And now they want to change the rules again. They said you can’t buy, you can only sell. Well, what’s going to happen to the price? It’s going to crater.

It went from Melvin Capital being Enemy Number One to Robinhood being Enemy Number One.

There were a lot of investors who saw this as an opportunity to take on the Wall Street establishment.

This idea that the system is rigged against the average person really took hold in the Reddit groups.

Why is that hedge fund over there allowed to do whatever it wants, and I’m not allowed to keep putting my bets on GameStop?

A lot of people came under this conspiracy theory that Robinhood had been forced to stop trading on GameStop because of the hedge funds. From what we know it’s categorically untrue.

The whole episode has got people thinking about this question of, how do you open up markets so that they are there for anybody to access? It can’t be fair that only Harry Hedgefund has figured out a way to make money out of markets. It’s got to be possible for everybody to participate. These are public markets.

There are millions of Americans out of work and stocks have essentially only gone up, despite the fact that we’re in a global pandemic.

And this was a stock that really became hinged and geared on the momentum. And so when that went away there wasn’t anything really propping it up.

Stocks, despite popular belief, don’t just go up. Stocks also go down, and that’s what happened to GameStop.

Well, I pulled $20,000 out cash, paid off pretty much all my credit, bought a hot tub. When it was really experiencing that huge peak, I actually – like a fool – I bought back in. I quickly saw on my account go from $90,000 down to like $20,000. I said cut my losses. So I had no regrets to lose that money, because that was not mine. I earned that by doing nothing. I was clicking buttons on a computer screen. Total probably spent four hours to make $100,000.

The accepted view on Wall Street is the retail trading community is dumb money. Whatever the retail trading community is doing, do the opposite. It’s a surefire way to make money. These guys don’t know what they’re doing.

The early WallStreetBets community were using sophisticated trading strategies.

Retail figured it out. Retail said, ah, OK, here’s a situation which there’s a choked float and we can buy calls, force call sellers to hedge by buying stock, and push the stock up, and there will be no supply of stock available for the short sellers to cover.

There’s a lot of people who were new to trading who made life changing amounts of money. It’s an incredible trade. They did incredibly well.

Hedge funds are really starting to think about how they can harness the momentum of retail traders. If they are against you it can be really dangerous. But if they’re behind you, you can potentially make a lot of money.

There were some institutions that made incredible money on this, whether they were in AMC bonds, or they were playing the GameStop stock.

There’s also a lot of people who bought at or near the top who’ve lost a lot of money on the way down.

At some point when you’re buying a share just because everybody’s talking about it you’re playing with fire.

This isn’t the kind of thrill you got at the end of a rollercoaster. It’s been really painful for a lot of everyday investors. They’re you, they’re me. They don’t work at a big fund.

And there were retail traders who got F Wall Street. It did feel like a David and Goliath battle. All we’re armed with is this Robinhood app.

It’s lots and lots of Davids and one Goliath.

There’s a lot of power and a lot of people. A lot of people were sort of imagining themselves on that sort of the digital battlefield here, standing among millions of people that were really, really doing it with them.

And for a moment they tasted sweet victory. Hedge funds have had to take notice.

As a result of this we’ve taken down a lot of our risk, we’re going to keep our position smaller, we’re going to be nimble. We just have to watch WallStreetBets and if a retail mob is forming we get out of the way.

This is a totally upside down way for the markets to be operating. I’ve never before spoken to investors, like serious institutional investors, who actually want to know what the retail guys are doing. Just when we were thinking this whole saga was over and we’d all learn lessons from it, the rollercoaster started rolling on. This time it’s a little bit more difficult to tell how much is down to retail traders and the Redditors, and how much is down to other sorts of investors. What we saw with this sort of second coming of GameStop shares tells you that this is all going to keep happening. It’s going to keep happening to these shares. It’s going to keep happening to other shares.

I would not be surprised if we see something similar in the next six months. This really for a lot of people has been kind of a proof of concept proven correct.

In the US retail investors and citizens, generally, have just had these stimulus checks land in their bank accounts and a lot of that money, about a third of it by some calculations, is going to end up in the stock market. That could be something like $170bn from retail investors. There is a school of thought that this will just add to this apparently relentless upward trajectory in particularly in US stock markets.

For those of us who are still short sellers, the nice thing is the trades aren’t very crowded. The other nice thing is there are lots of really crappy companies with massive valuations. So in theory, you should be short.

This has really caught the attention of regulators. There’s a big question about how financial advice should be regulated on social media platforms.

Washington reacted very, very quickly. Initially, to investigate the retail traders. Have these people gone together and manipulated the market? Retail traders stand around and said, but hedge funds do this all the time. Short seller takes a negative view of a company and they’ll do a report and they’ll put it out there and people will sell out of the company. So why is us getting together to drive the share price up market manipulation?

The SEC, it really seems like they’re actually more on the side of the retail investor than they are the shorted hedge funds.

They’re likely going to look at different trades on Reddit that there wasn’t actual outright fraud going on. Someone saying, hey guys, diamond hands, you’ve got to buy GameStop right now. And at the same time as they’re saying that, they’re actually selling.

I don’t think you’re going to see any sorts of regulators trying to stop retail investors accessing the markets. These are public markets.

There is a lot of concern in the market that valuations in the stock market, in general, have become detached from their underlying fundamentals.

Is GameStop worth $30 plus billion? Somehow these retail traders got it up to that amount. And that is essentially the definition of a bubble, when your valuation doesn’t quite match what your fundamentals are.

Markets are allocating capital to companies whose stocks have the tightest or most heavily controlled floats and are beneficiaries of passive buying. And that disadvantages companies that have good fundamentals but just aren’t well-positioned in terms of indicies or controlled floats, and they have to compete for capital against the companies that could be quite inferior, but from a technical perspective are well-positioned and we’ll get that capital – more of it and at a lower price. That is a huge problem.

For a while people have been getting a little bit nervous and saying, are we due for some sort of correction? Are markets looking a bit bubbly? One of the big ingredients that people look for that this really is a bubble is retail.

It’s the classic tale. If your mum or your neighbour or your Uber driver starts talking about a stock, it’s probably time to sell.

This has always been how professional investors look at markets. But this time it might be different because I don’t feel like the retail community is there just for the short term.

They now represent more than a quarter of the volume of share trading in the market.

In the moment when they send Melvin reeling, they’re attacking Citron Research, it’s validating.

I think that as long as the SEC and other regulatory bodies don’t place restrictions on this kind of stuff, it’s going to keep happening. David and Goliath is not a bad comparison. In my opinion, David won.

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