Video game retailer GameStop’s stock price has increased dramatically due to the actions of users on the WallStreetBets subreddit.
The Reddit users pushed the stock up from $20 on 11 January to a staggering high of $146.97.
The general reason for this is because the stock market is subject to wild speculation that can deem companies like Tesla, for example, more valuable than the nine largest automakers combined.
The more specific reason is that the company found itself as the central catalyst in a battle between short-sellers and online traders.
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What is GameStop?
GameStop is a US video game retailer. In the midst of the pandemic, when the company’s physical stores have struggled, it has become a target for amateur traders.
The store was not expected to turn a profit before 2023, but has seen its market value triple to $4.5 billion in three weeks, Bloomberg reports.
What is r/WallStreetBets?
WallStreetBets is a subreddit – a small community – on the social media app Reddit. Users of the platform have taken to trading stocks over the past several months, who treat the market as a “roulette wheel” rather than any long term wealth strategy, Vox reports.
The subreddit is described as the "Wild West of investing advice," or “like 4chan found a Bloomberg terminal”, with over one million subscribers to the page.
The community has had successes historically, such as exploiting a breach in a trading app that allowed for infinite leverage, but others have lost huge amounts of money in a group that takes glee in all-or-nothing ventures.
What happened to GameStop’s stock?
GameStop’s stock, as one Reddit moderator told Wired, was “a meme stock that really blew up.” The company was struggling financially both before and after the pandemic, with many analysts suggesting short-selling the stock to profit off its decline.
However, as Ars Technica reports, investor Ryan Cohen – who had previously invested in safe stocks such as Apple - bought a ten per cent stake in the retailer, a move which attracted notice. Cohen purchased enough to reach the board of directors, and pushed the company to expand its ecommerce prescence.
As the stock increased, short sellers found that they had to buy more stock in order to cover their borrowing, Wired reports. This is known as a “short squeeze”, when investors who have bet against a stock rising try to cover their loss and the price of the stock increases.
Ultimately, because GameStop looked like it was going to fail but did not, the perverse situation meant that individual stock buyers on WallStreetBets started pushing the stock upwards.
What happened with Citron Research?
The invested advice on Reddit laid the foundation for GameStop’s renewal, but it was the prospect of a battle against traditional short sellers that really drove the most unusual behaviour around the GameStop stock.
Citron Research founder Andrew Left, as Wired reports, suggested that the stock would drop from $41 to $20. “We understand short interest better than you and will explain,” he said in a now-unlisted video, and that he had never seen “people so angry about someone showing the other side of a trade” on a “failing mall-based retailer” .
This reportedly triggered tensions between WallStreetBets and Citron Research, with Reddit users essentially buying into the stock out of spite, fighting against the traditional Wall Street view that markets are driven by fundamental values, according to Corey Hoffstein, chief investment officer of quantitative investment and research firm Newfound Research, who spoke to Wired.
The response to the dispute simply pushed the stock higher, with GameStop closing out on $65.01 on Thursday. Although that will likely not be sustainable as WallStreetBets finds other interests, those who did buy into the hype market have seen an on-paper profit from their moves.
According to Bloomberg, one WallStreetBets user claims he rolled a nearly $55,000 investment in GameStop call options into an $11.2 million paper fortune with Bawse1, a WallStreetBets moderator, telling Wired that this is the first time in years on WallStreetBets that “everybody was making money.”
Did r/WallStreetBets get shut down?
In the aftermath of the changes, the WallStreetBets subreddit was temporarily made private before being reopened again, due to a huge influx of users attempting to join.
“We have grown to the kind of size we only dreamed of in the time it takes to get a bad nights sleep,” the moderators said in a post. “We’ve got so many comments and submissions that we can’t possibly even read them all, let alone act on them as moderators,”
Separately, as Reuters reports, the Discord voice-chat channel for the group said it removed the WallStreetBets server from the platform for violating its guidelines on hate speech.
“We decided to remove the server and its owner from Discord for continuing to allow hateful and discriminatory content after repeated warnings,” a Discord spokesman said, and had apparently issued multiple warnings to the server admin before doing so.
“The server has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin", Discord also said, as reported by Engadget.
"To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks. Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors. We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate."
In response, the WallStreetBets moderators said that its Discord was “the first causality” of its success.
“You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad. That room was golden and the people that run it are awesome. We blocked all bad words with a bot, which should be enough, but apparently if someone can say a bad word with weird unicode icelandic characters and someone can screenshot it you don't get to hang out with your friends anymore,” the moderators wrote in the aforementioned post.
“Discord did us dirty and I am not impressed with them destroying our community instead of stepping in with the wrench we may have needed to fix things, especially after we got over 1,000 server boosts. That is pretty unethical.”
What happens now?
It is unclear, should hedge fund companies continue to lose money on stocks, whether regulators will step in.
“We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants", the US Securities and Exchange Commission said in a statement.
The Biden administration has also said that it is monitoring the situation. "It is a good reminder that the stock market is not the only measure of the health of our economy and it does not reflect how working and middle-class families are doing," the White House said in a briefing.
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