We’re now three trading days into some frothy drama between Reddit and Wall Street over the rocketing price of GameStop stocks. Largely believed to be the result of the subreddit WallStreetBets, pseudonymous Redditors are claiming absolutely bonkers returns on their Robinhood accounts from a company that has been in considerable financial decline for the better part of a decade.
In one corner of this bizarre prizefight: hedge funds, which are haemorrhaging money after (unsuccessfully) shorting GameStop. In the other: r/WallStreetBets, a subreddit with 2.4 million members, many of whom have been buying up stock options in the company, resulting in a rise from $US17 ($22) per share to the current price of $US230 ($297) (and climbing).
For a sense of why a group of people might seemingly throw away real money on GameStop — an early 2000s stripmall merchant of ancient gaming memorabilia, such as discs, which has posted consistent, overwhelming losses and has essentially been supplanted by digital game sales — WallStreetBets’s bio reads: “Like 4chan found a Bloomberg Terminal.” A WallStreetBets moderator has called it a “meme stock that really blew up.” (Meme stocks are often indicated on WallStreetBets with rocket emojis, essentially an investment signal.)
While Redditors have claimed to make tremendous profits off what is essentially an artificial inflation of stock demand, Melvin Capital, a major loser in the GameStop debacle, was just promised a $US2.75 ($4) billion cash injection from two other hedge funds. In emails to Gizmodo, the SEC and Melvin Capital declined to comment.
It is unclear whether the move was intended as a collective siege against the establishment, but subreddit members seem pretty pleased about the current outcome. It’s also stirred up a long-simmering conflict between WSB and CNBC, which some members perceive voice of the establishment. In their estimation, CNBC seems to be guilty not for any one specific offence, but for featuring a rotating cast of billionaire venture capitalists, and CEOs who, they generally believe, use their celebrity to personally sway the market, while occasionally writing off WSB as “psychopaths.”
In an open letter on r/WallStreetBets, user RADIO02118 fired back a screed against both perceived enemies, in rather colourful terms:
These funds can manipulate the market via your network [CNBC] and if they screw up big because they don’t even know the basics of portfolio risk 101 and using position sizing, they just get a bailout from their billionaire friends at Citadel […] We don’t have billionaires to bail us out when we mess up our portfolio risk and a position goes against us. We can’t go on TV and make attempts to manipulate millions to take our side of the trade. If we mess up as bad as they did, we’re wiped out, have to start from scratch and are back to giving handjobs behind the dumpster at Wendy’s.
Seriously. Motherfuck these people. I sincerely hope they suffer. We want to see the loss porn.
WallStreetBets has been happily sharing gain porn. Though impossible to verify, one user posted a screenshot showing a nearly $US500,000 ($645,450) gain in a single day.
If truly the handiwork of WallStreetBets, it represents a large, collective leap of faith. Rather than simply buying stocks at face value, GameStop traders have reportedly been dealing in a vast number of options contracts, a deal to hold the right to buy and/or sell a bundle of stock for a low premium. This can be transacted through Robinhood, but the actual stock owner is typically a large financial firm. There’s a much higher potential gain, but it also means traders can end up several hundred dollars in the hole with zero stock to show for it if the price does down.
Here’s a rough, very imperfect analogy of how options work: a grocery store (a large financial firm) is selling apples (100 shares of stock) for a dollar. If you expect the price of an apple to rise, you can pay the store a nickel in exchange for the promise that you can still buy the apple for a dollar on Friday. In the meantime, you can sell the contract to someone else. If you hold the contract until the end of the trading day on Friday, and the price of the apple is $US1.50 ($2), you can buy the apple for the dollar or sell it back to someone else or to the grocery store for a little less, maybe $US1.40 ($2). Then again, if the price of apples drops to 90 cents ($1.16) on Friday, you’re probably best off not overpaying, and the grocery store pockets your nickel.
It’s obviously a lot more abstracted from reality than that, and these numbers are not at realistically proportional to actual contracts. But the gist is that, as a result of this sudden run on apple derivatives, the store is incentivized to buy more apples to offset its costs in case the price of apples go up and more people want the contracts. In other words, buying up a lot of contracts has forced institutions to buy up more stock, which has further driven up the price of GameStop.
This isn’t the first time WallStreetBets has been linked to incredible pandemic jumps — for instance, last year, when Hertz filed for bankruptcy and Robinhood traders bought up the zombie stock en masse, likely helping to drive a 500% increase before Hertz was delisted from the New York Stock Exchange.
Though some investors have hedged their bets over the past few months on the genuine belief GameStop will pivot to a lucrative online enterprise — and e-commerce sales have multiplied during the pandemic — others have pointed out that the current stock price is a bit high. Investor Andrew Left, who warns about scammy companies and dangerous investments, predicted that the GameStop bubble would soon burst. Left then tweeted that he would cease all commentary on GameStop following an attack by an angry mob that allegedly tried to hack his Twitter account.
WallStreetBets is also believed to be behind a surge in Blackberry, which is currently up 38% since last week. Gizmodo has reached out to the moderators of WallStreetBets and will update the post if we hear back.