Wall Street vs. The Internet

By: Jake Sheckter  |  February 7, 2021
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By Jake Sheckter

Over the last couple of weeks, too many of us have been yelled at by friends, family, and absolute strangers to invest our life savings into GameStop stock, to “hold the line,” or that their methods will surely take them “to the moon.” If you have no idea what this all means but have been caught in the crossfire of day-traders and memes, you should know that you are not alone. GameStop, a company that sells physical copies of video games, used to be a bustling hub for gamers of all shapes, ages, and sizes. However, due to recent years of online video game downloading and disc-less gaming consoles, GameStop has become the obsolete dinosaur we find in the shadowy corners of dying shopping centers. This steady decline was apparent in the company’s stock price as it fluctuated (roughly) between $20 and $50 for almost a decade between 2007 and 2017, before falling to less than $15 in 2018 and 2019, and finally hitting close to a $3-$5 rock bottom over the last two years.

So, what is going on? Essentially, millions of average people made a huge bet against some enormous financial institutions, and won, even if only temporarily. Practically speaking, this means we are witnessing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent history, so it is, understandably, the only thing on everyone’s minds.

How did this come to be? A large subgroup on the discussion board website “Reddit” named “r/WallStreetBets” came to the conclusion that GameStop’s stock was undervalued. Spanning the next few months, r/WallStreetBets singled out a major fault in the strategies of a few massive hedge funds which had bet many millions of dollars that GameStop’s final days were approaching. These ‘Redditors’ would then buy incredible amounts of GameStop stock at their extremely low prices, continue to purchase more as the prices rose, which resulted in quickly forcing what is known as a “short squeeze” that not only drives the price up but cleans out the pockets of hedge fund managers along the way.

What is “shorting”? Shorting is a bet that a company’s stock will decrease in value. An investor (borrows and) sells shares at a specific (high) price, betting that in the near future the price of that stock will drop. The investor will then later be able to buy the stock at the predicted lower price to “cover” their shorts, therefore “closing” the deal and profiting the difference between the price they sold at (originally) and their recent low buying point. By shorting a company (which huge hedge funds do all the time), downward pressure is forced on the stock price. This means that an already struggling company can get knocked down even further, solely because some giant hedge fund invests millions of dollars shorting it to make a quick buck. So what happens when a shorted stock soars skyward instead of decreases? This is called a “short squeeze” and to sum it up, the short seller can lose a whole lot of money. 

A company named Melvin Capital Management very quickly became this short-seller loser after shorting millions of dollars in GameStop stock. Melvin Capital Management, along with Citron Research and a few others, made an unfortunate bet that GameStop would continue to decline (to around $2 or $3 dollars) and therefore allow them to take out a huge profit, as they normally would. But this was not like any other time. In a flexing match of the strongest wills, Redditors pumped up the stock price (to over $443 dollars), according to GameStop’s Stock Ticker (GME), while the hedge funds kept doubling down and shorting the stock even further, hoping they would come out on top with a low price to cover their positions (which never came). It is significant to note that this scenario is very rare due to the fact that short-sellers would need to short more shares of a company than actually exist (in our case, over 140% of existing shares were shorted).

This means that even if every short seller wanted to close their positions, they wouldn’t be able to because the shares technically don’t exist. What makes this case different is that Redditors caught on early and decided to take Wall Street on a run for its money. Redditors bought and refused to sell their GameStop stock while short-sellers couldn’t cover their shorts without forcing themselves into billions of dollars in losses because the stock was excessively over shorted, practically backing themselves into a corner from which they couldn’t escape unharmed.

This resulted in an internet and even America-wide “us-versus-them” mentality. If you bought GameStop and refused to sell to anyone, consequently “holding the line,” you became part of a much larger, internet-frenzied, whole. If you caved in and sold your shares before the collective took GameStop “to the moon,” you were deemed a traitor who helped out the hedge funds. Over the last weeks, Melvin Capital has lost close to a reported $3 billion dollars to this short squeeze.

What does this all mean? With tensions rising as trading platforms like Robinhood halted trading and later only allowed GameStop stock to be sold, not bought (taking the hedge funds’ side), the market instability of certain stocks has only been increasing. We are witnessing the democratization of financial information, to a certain extent. It is extremely apparent that a large portion of the group that makes up r/WallStreetBets has had enough with the growing inequality, and is tired of seeing massive Wall Street corporations continue to step all over “the little guy” to make a quick buck.

For decades, the middle-class people of America have followed a narrative stating that the large banks and towering hedge funds should be the entities to control the economy and get wealthy throughout. Meanwhile, the average working citizen is stuck with stagnant wages, record consumer debt, and financial advice telling them to wait until the end of their lives to retire. WallStreetBets claims that this major, societal swing will transfer power to the masses and away from the hedge funds, giving middle-class America hope for a change in their story to come.

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Sources:

https://finance.yahoo.com/quote/GME?p=GME&.tsrc=fin-srch

https://www.wsj.com/articles/melvin-capital-lost-53-in-january-hurt-by-gamestop-and-other-bets-11612103117#:~:text=GameStop%20Mania&text=Maplelane%20Capital%2C%20another%20hedge%20fund,GameStop%2C%20AMC%20Entertainment%20Holdings%20Inc.

https://www.nbcnews.com/business/business-news/gamestop-reddit-explainer-what-s-happening-stock-market-n1255922

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