GameStop is a retail chain with about 5,000 locations across North America which, as its name suggests, sells video games and game-related accessories.
Like many retailers, its business has been under pressure for several years now, because of a shift away from physical stores and toward online selling, which GameStop currently does very little of. Then the pandemic hit, exacerbated those problems and sent the stock down to multi-year lows.
In the early days of COVID-19, the company’s shares were changing hands at around $4 US a share. They hit almost $400 on Wednesday for no good reason other than being caught in the middle of an epic battle between a couple of million online Davids who share stock tips on profanity-riddled message boards and the bespoke-suited stuffy Goliaths of Wall Street investment funds.
Day trading and individual investing have boomed over the past several months, with activity often taking place or being discussed on platforms such as Reddit and Robinhood instead of in more traditional arenas. And one big question amid the frenzy has been how much the little guys really matter. Sure, small-time investors trade a lot, sometimes to the annoyance of more traditional institutions, but are they really consequential?
In the GameStop saga, at least, the answer is yes. An army of traders on the Reddit forum r/WallStreetBets helped drive a meteoric rise in GameStop’s stock price in recent days, forcing it to halt trading multiple times and causing a major headache for the short sellers betting against it and banking on the stock falling. It’s a captivating David vs. Goliath story, where David — at least for now — appears to be winning.
Famed investor and CNBC personality Jim Cramer called the GameStop drama the “squeeze of a lifetime.” Bloomberg opinion columnist Matt Levine posited that one possible explanation for what happened could be “utter nihilism” on the part of the Reddit crowd, a story “perhaps best told with a series of rocket emojis.” Or maybe one of the WallStreetBets moderators put it best to Wired: “It was a meme stock that really blew up.”
While the hedge funds and other professional money managers had been shorting GameStop’s shares, betting that its stock was doomed to further decline, the retail investors — online traders, mom-and-pop investors, small brokers and others — have been pushing the other way, buying shares and stock options. That caused GameStop’s market value to increase to over $24 billion from $2 billion in a matter of days. Its shares have risen over 1,700 percent since December. Between Tuesday and Wednesday, the market value rose over $10 billion.
Beginning last summer, GameStop shares started to rise after an investment firm owned by Ryan Cohen — founder of Chewy, the online pet supplies shop, whose stock was popular with retail investors — bought a stake in the company and joined its board. Around the same time, some hedge funds were betting that GameStop’s stock would plummet. The company had been reeling from consumers’ shifts to online commerce and streaming, but the pandemic was bruising it further.
Short-selling works this way: An investor, who expects a stock price to fall, borrows shares of that company from another investor for a fee and sells it immediately, hoping that when the price does fall, they can buy the shares back cheaply, return them to the owner and pocket the difference.
One could call the game “burn the bears” – the bears being short-selling hedge funds who had bet last year that the share price had further to fall. They reckoned without a Reddit forum called r/WallStreetBets, where amateur traders gather, in this case to spot a daring counterattack – an uprising to propel the share price higher.
You have to admire the imagination. Short-sellers had bet so heavily on catastrophe for GameStop that they were vulnerable to any sudden reversal. In the old days, private punters would not have been able to assemble enough collective financial firepower to make a difference. Now, like the professionals, they have access to financial leverage in form of zero-commission derivatives – futures and options – to throw a few sticks of dynamite into the mix.
The explosion forced the hedge funds to cover their losses by buying stock, thereby adding to the upward momentum. The phenomenon is not new, but it’s hard to think of another example on this scale. Two hedge funds, at least, have been severely scalded, which, according to the subreddit, was half the point of the exercise. It was about getting one over on Wall Street.
