GameStop, a US video game retailer, has increased more than eighteen-fold since January 12, from $19 to $348. GameStop was worth $2 billion in December, is now worth $24 billion; almost the same as the meat giant Tyson and the fuel refiner Valero Energy.
This sudden rise was the result of actions that helped fuel a ‘short squeeze’ in GameStop stock, where investors who had used options to bet against the stock needed to cover those bets by buying shares.
When investors are involved in betting on which way a stock will go — up or down, it is known as a short squeeze. These bets are placed by buying the shares themselves, or stock options, which we’ll grossly oversimplify here.
Investors who bet against a stock are called “shorts.” In GameStop’s case, the shorts include at least two big hedge funds.
The role of Reddit in GameStop’s rise: The Power of Reddit
Reddit is a social news platform that allows users to communicate with each other and vote on content that other users have submitted.
Stocks of GameStop surged about 1000% in two weeks after a group of amateur investors active on the online forum Reddit banded together to fight the Wall Street funds that had pushed its price lower. A surge of retail stock trading over the last year lit the fuse that sent shares of GameStop Corp rocketing higher without a clear business reason. Recent action among Reddit traders has been centered around shares that have been heavily “shorted” by other market players.
Reddit’s Wall Street Bets forums are what has resulted in this sudden high rise in GameStop’s stocks. Wall Street Bets, or WSB, is where armchair traders gather to share memes, commiserate over losses and share more memes. But they also trade tips and analysis that can go on for pages. Aggressive maneuvers against the ‘shorts’ aren’t necessarily limited to the amateurs. Wall Street’s big players know a good opportunity when they see it.
It’s crazy how Reddit, an online chat community that consists mostly of gamers, has pushed GameStop so high up the ladder.
GameStop also surged 50 percent in extended trade after Tesla founder Elon Musk tweeted “Gamestonk!!”, along with a link to Reddit’s Wall Street bets stock trading discussion group, where supporters affectionately refer to the Tesla CEO as “Papa Musk.” “Stonks” is a humorous term for stocks widely used on social media.
GameStop’s shares started to rise late last year, after the founder of the pet-supply site Chewy bought a stake in the company and got a spot on its board. Slowly, the company gained the attention of WSB on Reddit and traders who are active on the gamer-friendly social media service Discord.
Hedge Funds investing in GameStock
Melvin Capital is a hedge fund with a “short position” on GameStop. A short position means Melvin was betting GameStop’s share price would fall (a reasonable bet, as the outlook for bricks-and-mortar video game stores is a bit like what happened to Blockbuster and other video rental outlets). Investors seized on the fact that Melvin, and another fund called Citron Capital, had significant short positions in GameStop.
Melvin tried to sustain its short position, because the hedge fund’s managers believe the stock is overvalued, and has suffered massive losses as a result (last week, Melvin announced it was already down 30% on the year).
Robinhood restricts trading in GameStop
Robinhood, a free-trading app, is receiving a lot of attention after many members of a Reddit forum, Wallstreetbets, encouraged others to buy heavily shorted stocks like GameStop, BlackBerry, and Nokia. However, Robinhood has now placed restrictions on the trading in such high-flying stocks.
“Our mission at Robinhood is to democratise finance for all…Amid significant market volatility, it’s important as ever that we help customers stay informed,” said Robinhood.
Reactions on Twitter
The sudden rise of GameStop due to an online chat community is not something we witness every day. People on the internet have taken it up to their social media accounts to share their views- and even memes, on this turnout.
— Bennyboy (@BenjaminLzicar) January 27, 2021
GameStop sitting amongst Tesla and Amazon after reddit users make it a Fortune 500 company pic.twitter.com/AVUtcjs6gl
— Jordan Deeb (@Jordan_Deeb) January 27, 2021
Me pretending to understand the stock market in order to partake in the GameStop memes pic.twitter.com/56bLVdALy6
— arianna (@mrtaytoofficial) January 27, 2021
Wall Street colluding with Big Tech to in a clear Securities Exchange Act violation and Sherman-Anti Trust violation to stop lawful trading by individual investors. You can’t change the rules because you’re losing. #DeleteRobinhood #reddit #reddittraders https://t.co/qRQDArn71M
— Paul Gosar (@DrPaulGosar) January 28, 2021
— cyberisques (@cyberisques) January 28, 2021