GameStop, as well as other previously downtrodden stocks, experienced an intense surge after frenzied speculation and purchases by investors on internet forums such as r/WallStreetBets.
Several weeks ago, the GameStop stock sat at around roughly $15 a share, with its expected prospects for the future being less than optimistic. The retail chain, GameStop, had been experiencing a downward trend in sales that only worsened with the COVID-19 pandemic. Over the few years, many outlets dedicated to video game journalism such as Polygon and Screenrant, covered the slow fallout of the company as stores closed and layoffs began.
This led to professional, primarily wealthy investors based in Wall Street, to engage in a practice called “shorting,” in which investors aim to gain a profit by predicting a stock to fall. This is achieved by borrowing a share in a given company at a price of say, $10, and selling it to a third party for the same amount. If the stock falls as expected, the investor can buy back the stock they sold at a lower price and return it to the first party while keeping the profit, according to Investopedia.
This tactic is typically only viable for wealthy and accredited investors who can be trusted to be able to pay back the difference in the event that the stock rises. These wealthy investors often pool their investments together into large funds called hedge funds, in which partnered investors can utilize the funds to engage in risky strategies like shorting.
In short, large hedge funds, such as Melvin Capital, composed primarily of wealthy investors based in Wall Street aimed to short GameStop stock and make a profit off the resulting fallout. From there, r/WallStreetBets, based on the internet forum Reddit, took center stage.
The WallStreetBets forum is composed of prospective investors in the stock market from an array of different political, financial, and temperamental backgrounds, all loosely connected in the goal of trying to make profit off of investments. On Jan. 22, users on the forum slowly began bolstering a movement in mass to begin purchasing shares in GameStop and other low-priced stocks, causing the worth of these shares to skyrocket as the supply of shares in the company became more coveted.
Whereas one share’s worth of GameStop stock was worth less than $20 at the beginning of the month, frenzied buying by internet users raised the stock’s worth up to a high of $469.42 on Jan. 28. This tactic is referred to as a “short squeeze,” as it forces investors who borrowed shares in an effort to short a given stock to buy back the shares at a higher price, thus causing them to lose money. The more shares they borrowed, the more they have to buy back, thus causing a feedback loop that increases the worth of a stock.
Gamestop is not the only stock experiencing such volatility either. Shorted, previously low valued stocks such as AMC Entertainment, Bed Bath & Beyond, Ligand Pharmaceuticals, iRobot, Clovis and others have experienced a large, unexpected surge due to the antics of the WallStreetBets forum and other internet users enacting short squeezes.
r/WallStreetBets users champion the movement as an act of rebellion against the wealthy Wall Street billionaires and hedge funds whom they perceive as responsible for economic crashes and faults over the past several years. One reddit user who invested in GameStop stock recounted the stock market crash of 2008 and its drastic effect on his family’s income in a post published on the r/WallStreetBets forum.
“I remember when the housing collapse sent a torpedo through my family,” forum user Space-peanut wrote. “My father’s concrete company collapsed almost overnight. My father lost his home. I remember my brother helping my father count pocket change on our kitchen table. That was all the money he had left in the world. While this was happening in my home, I saw hedge funders literally drinking champagne as they looked down on the Occupy Wall Street protesters. I will never forget that.”
“This is all the money I have and I’d rather lose it all than give them what they need to destroy me. Taking money from me won’t hurt me, because I don’t value it at all. I’ll burn it all down just to spite them.”
The hedge funds and billionaires that took short positions in the soaring stocks have suffered heavy financial losses over the past few weeks. The Melvin Capital hedge fund took a 53% loss in January, according to The Wall Street Journal. A spokesman for the firm stated that the hedge fund has closed out of their position in GME, though many short squeezers doubt these claims.
Reuters reported that short-sellers lost an estimated $70.87 billion from their ill-timed positions in squeezed stocks as of Jan. 28, according to financial data analysis firm Ortex. WallStreetBets users and sympathizers show no sign of selling their shares anytime soon, with forum posts calling for investors large and small to “hold the line” and take the stock further “to the moon.”
One of the largest and most accessible stock trading apps Robinhood came under heavy criticism for temporarily blockading purchases on volatile stocks like GameStop and AMC Entertainment and only allowing sales of the stocks to be made. Several class-action lawsuits have been filed against the company for restricting the ability to purchase shares in the free market, as well as prematurely selling some stocks without the investors consent. Robinhood CEO Vlad Tenev has defended the company’s actions as a “difficult decision” to protect investors.
“Robinhood is a brokerage firm; we have lots of financial requirements, including SEC net capital requirements and clearing house deposits, which is money we have to deposit at various clearing houses,” Tenev said to CNBC News. “Some of these requirements fluctuate quite a bit based on volatility in the markets, and they can be substantial in the current environment where there’s a lot of volatility and concentrated activity in these names that have been going viral on social media. We’re really in unprecedented times, and in order to protect the firm and our customers we had to limit buying in these stocks.”
Massachusetts senator Elizabeth Warren has called upon the U.S Securities and Exchange Commission to provide an in-depth rundown on the situation in order to “prevent market manipulation.”
“The SEC has a mandate to ‘protect investors, maintain fair, orderly, and efficient markets; and facilitate capital formation’ and ‘promote a market environment that is worthy of the public’s trust.’ The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders,” wrote Warren in an address to the SEC.
The Massachusetts senator asked the SEC to provide a response by Feb. 5th. The SEC has said that it is closely monitoring GameStop and other volatile stocks for abusive trading activity, and will continue to “facilitate a robust public dialogue among market participants and investors on the structure and operation of our securities markets.”
