The Mystery behind the GameStop stock uprising

A subreddit calls the shots of the Stock Market, at least for a while


GameStock (GME), the brick-and-mortar video game retailer, was expected to decline in value as it gradually lost its market share to e-commerce companies like Amazon, causing hedge funds to short-sell it last year. Short-selling is a process by which investors borrow stocks at a high price, selling them at market value, assuming that they will be able to repurchase them at a later date, effectively betting against the stock. This assumption, however, came back to bite the Wall Street traders. Amateur traders, gathering on the r/WallStreetBets subreddit, launched a coordinated counterattack, buying shares to raise the share price to rescue the failing company and cause hedge funds to lose money. Individually, these private traders would not have been able to have an impact. By banding together, they wielded enough financial power to force hedge funds to buy stock to cover their losses, further propelling the share price from 18 dollars per share in early January to a 348 dollar per share peak on Jan. 27, a 1,900% increase. Multiple hedge funds suffered significant losses, including Melvin Capital Management, which lost 53 percent on its portfolio in January. Many on Wall Street have called for the investigation of the surge, calling it market manipulation. This, however, has no momentum; amateurs meeting via chatroom to talk up a stock does not equate to a conspiracy. 

GME has a common sense value of just two billion dollars, a twelfth of the value implied by the share price last Wednesday. The certainty of a price crash following the recent boom has concerned many market analysts, as it may lead to a crash. Similar efforts to raise the share price of other short-sold stocks like AMC Entertainment (AMC) and Nokia (NOK) caused many failing stocks to peak on Jan. 27 before dipping back down. However, all of these stocks opened significantly higher on Feb. 1 than their early January average. 

Robinhood – the brokerage firm famous for making trading easy and eliminating trading fees – put restraints on the trading of 50 companies during the Reddit-fueled buying frenzy last week. This was highly criticized by investors and politicians from both sides of the aisle, including Representative Alexandria Ocasio Cortez and Senator Ted Cruz. The move was denounced as antithetical, and lawmakers accused the platform of market manipulation favoring big traders. Robinhood defended their restrictions, saying that the three billion dollars in additional collateral demanded by the Wall Street clearinghouse were simply too much for them to pay. After raising one billion dollars to cover the transactions, Robinhood removed restrictions on Jan. 29 from all but eight companies – GameStop, BlackBerry, AMC Entertainment Holdings, Express, Genius Brands International, Koss Corporation, Naked Brand Group, and Nokia, all of which were shorted by hedge funds. To scale to meet the platform’s demand, Robinhood raised 2.4 billion dollars over the weekend, aided by investors like Ribbit Capital and Sequoia Capital.

The fluctuation in stock prices puts additional pressure on Gary Gensler, Biden’s pick for the Securities and Exchange Commission (SEC) head. Gensler will soon take over the SEC and address the calls for tighter regulation of online trading. Barbara Roper, director of investor protection for the Consumer Federation of America, said that online trading turned to invest “into a video game or turned into a casino,” worrying that there will be “some pretty serious repercussions for the way we use the markets to fund our economy.” Roper is not alone in these calls, and as the future head of the SEC, Gensler plans to reexamine policies concerning online trading.

On Monday, Feb. 1, GME shares fell by more than 20 percent. Towards the end of the week of Jan. 25, the retail traders switched targets, focusing on silver. A metal tracking service reported an influx of 944 million dollars on Jan. 29. The price of silver jumped by more than 11 percent on Feb. 1 as online silver retailers struggled to keep up with demand. However, the Reddit traders’ strategy to force firms to buy GameStop shares will not work on silver. Silver is a much larger market, making it much more difficult to influence. Additionally, silver shares have been rising since last year, and by investing in silver, amateur traders will only serve to benefit the hedge funds. Redditors have expressed their concerns that investing in silver is only serving to take attention away from GME.

These swings in stock and metal prices are only possible because of online trading, which has fundamentally changed the stock market. Surges and drops like these will only become all the more frequent in coming years as companies like Robinhood allow amateur investors to mobilize their money without trading fees. Keith Gill, a leading investor in GME known by his Reddit username DeepF–kingValue, likened the movement to a revolution. When asked what the exit plan was for the movement, he simply responded, “what’s an exit strategy.” Gill and other organizers have urged the amateur investors to hold onto their shares of the shorted stocks until “Wall Street is at its knees.”