The idea that a group of amateur investors on a Reddit community would cause hedge funds to lose billions would have been met with ridicule and disbelief in 2020. Yet the events of late January 2021 proved otherwise. The GameStop Short Squeeze of 2021, triggered by the Reddit forum r/WallStreetBets, was completely unexpected and received widespread coverage from mainstream media outlets, as well as a significant amount of controversy. Though the hysteria generated seems to have (mostly) calmed down a month later, it is certain that the events will have a huge impact on stock trading for many years to come.
To contextualise, GameStop is an American video game retail company. Though successful in the early 2000s, in recent years, its fortunes declined, largely as a result of consumers’ transition to online services, as well as poor businesses decisions and failed investments into different markets. This caused the value of GameStop’s stock price (GME) to gradually decline over the past decade.
r/WallStreetBets, meanwhile, was founded in 2012 as an online community on Reddit, generally used for discussion over high-risk stock transactions by amateur traders. In 2019, Keith Gill, a marketing professional, financial analyst and Redditor known by “DeepF***ingValue” or “RoaringKitty”, purchased $53,000 of GameStop stock in the summer of 2019, believing the stock to be significantly undervalued. His optimism in GME was met with confusion and mockery from fellow users on the subreddit, who found it to be foolish even by their standards.
Still, Mr Gill persisted, continuing to post updates on the stock to the bewilderment of his peers on the subreddit. And eventually, as the stock began to gradually rise in the last few months of 2020, many fellow Redditors began to see Gill’s point of view and buy into GME. More and more users began buying the stock, which caused its value to rise even higher, which prompted even more users to buy-in. It was a virtuous cycle, and by early January 2021, it was showing no signs of stopping, as hundreds of thousands of people flocked to trading apps like Robinhood to get in on the action.
By the end of January, the stock value had gone from being worth $2.80 on 3rd April 2020 to $347 on January 27th 2021, a 1500% increase in just 2 weeks. It was also noticed by many news outlets and mainstream figures, such as Elon Musk, who tweeted his support, as well as the Biden administration, who began investigating. By now, Gill, who had seen his $53,000 investment rise to a staggering $48,000,000, had become a hero-type figurehead to the subreddit, with hundreds of thousands of amateur investors waiting eagerly for his daily updates to decide their next step. Sheer pandemonium was going on on r/WallStreetBets by this point; posts were flooded with hundreds of thousands of comments all echoing the same Internet slang phrases, “TO THE MOON!”, or the rocket and diamond hand emojis. It also caused a domino effect on some other declining stocks, such as Blackberry and cinema brand AMC.
This phenomenon caused controversy, especially among short-sellers. Short selling is a type of trading practice in which the trader borrows stocks and immediately sells them, hoping to buy them back at a lower price as the stock value falls. It is, essentially, the reverse of regular trading, in that the short sellers make money from the stock value falling, rather than increasing. Short sellers had identified the dying GameStop stock as one to gamble against. However, the “short squeeze” of GameStop (i.e., a stock value suddenly skyrocketing), resulted in these short sellers selling the stock at a low price but having to buy them back at a high price. The short squeeze resulted in rich investors and investment funds collectively losing billions of dollars, like Melvin Capital, which lost 53% of its investments.
However, on January 28th, trading apps like Robinhood halted all purchases of GME, only allowing its users to sell the stock, claiming that the restrictions were due to trading collateral (repayment) being increased. This prompted a large outcry from r/WallStreetBets, who claimed it was an act of market manipulation, with Robinhood accused of being in the hands of the powerful bankers, as well as multiple lawsuits being filed.
The halting of trading resulted in a substantial decline in GameStop’s value in early February, falling over 80%. r/WallStreetBets initially remained optimistic over the stock, especially has Keith Gill was still “holding” (i.e. not selling) the stock, despite losing millions. However, Gill’s daily updates soon stopped, as an inquiry was opened into whether he broke federal law by encouraging buying. He was eventually called in to testify in front of the US House Committee on Financial Services on February 15th, where he insisted that his updates did not constitute financial advice.
Though r/WallStreetBets had initially attempted to hold on to the stock, the majority of users eventually accepted defeat; by mid-February, the subreddit had devolved into self-mockery, with the majority of posts being people showing others their misfortunes and their losses, and others ridiculing them. Keith Gill, their figurehead, had disappeared. Trading apps had halted trades. The rich, it seemed, were against them. The media had moved on. It seemed like the movement was over.
The GameStop short squeeze and its orchestration by Reddit users received a wide variety of opinions from across the internet. Many commentators saw the movement as an example of working-class solidarity, praising the amateur investors for taking the game of stock trading away from the hands of the rich; for example, comedian Jon Stewart stated “they're joining a party Wall Street insiders have been enjoying for years”. The decision of Robinhood to halt the trading of GME, meanwhile, provoked widespread criticism from across the political spectrum, with even fierce enemies Alexandria Ocasio-Cortez and Ted Cruz uniting in their condemnation.
Reddit co-founder Alexis Ohanian, among others, compared the movement to a more effective version of the 2011 Occupy Wall Street movements, intended to address wealth inequality, though Mr Gill insisted he "wasn't a rabble-rouser out to take on the establishment, just someone who believes investors can find value in unloved stocks”.
The short squeeze did receive some criticism from many; for example, US Senator Elizabeth Warren criticised both sides of the movement and argued for more market regulation. Many believed the idea of a comparatively small group of people were able to influence the market on such a level was bad and needed to change, while others criticised the mass coverage that the story received, believing it was only temporary.
The success of many new investors introduced the idea of amateur trading to hundreds of thousands of people for the first time, while the mainstream media was forced to report on the story and explain the subreddit’s numerous Internet slang-like mannerisms was described as monumental for internet culture. Despite Mr Gill asserting the idea of the working-class banding together to defeat the rich was never his intention, the fact that numerous figures united in their praise is a testament to its power. The story has also attracted media adaptations, with numerous films being planned by multiple studios.
The movement was short and seemed to be over by mid-February, but it was an undeniably huge moment for amateur trading. A large proportion of the stock declining to its pre-surge levels can be attributed to the halting of the stock by trading apps in early February; had this not happened, it is difficult to say how much further the stock would have skyrocketed. But as of 28th February, the day this article was written, it is looking like the movement will not be over; the past few days has seen yet another surge in the stock value, though not quite on the same level. It remains to be seen what the long-term impacts of the surge will be; perhaps a renewed interest in amateur trading will result in cyclical surges for other dying stocks in the future. One thing is for certain – the stock market will never be the same.