For the longest period, the stock market tended to be controlled by big investors and institutions, who owed the majority of the cash and capital; share prices will go up or down depending on their prospect of said companies and retail investors are largely at their mercy.
However, what we will be discussing in this article is a strange recent case, where the tables had turned and investment bankers suffer massive losses as the ‘retail investors’ decided to collectively bite back.
What is GameStop and Why is it Significant?
For the majority of the American population, GameStop is a company that needs no introduction. The video game merchandise retailer was founded in the 1984 and has been the go-to store for purchasing PlayStation, Xbox and other video game-related products for decades.
However, ever since the rise of online retailers and the advent of digital-only video game downloads, GameStop had been struggling to profit since around 2012 and was seen by many to be in decline.
This turn of events caught the attention of short sellers such as Gabe Plotkin, owner of Melvin Capital, as well as Andrew Left of Citron, as they believed that GameStop had become an easy target for profitable shorting on the stock market.
These investors’ plans to attempt to profit from the decline of the iconic video gaming retailer became a topic of discussion on r/wallstreetbets (also known as WSB), a subsection of Reddit dedicated to stock market strategies, where many users were unhappy about it.
The WSB community originally caught wind of the scheme on 29th November, when one Redditor found out that someone or some organisation has been selling massive volumes of GameStop stock, — volumes that happened to match the number of GameStop shares owned by Melvin Capital at that time.
All the findings from this Reddit user’s research seemed to indicate that Melvin Capital was about to short GameStop in order to turn substantial profits by flooding the market with cheap shares.
The ‘Crusade’ Against Wall Street Hegemony
Motivated by a potent combination of collective nostalgia for the GameStop brand and disdain for the perceived corruption of ‘Wall Street elites’, the netizens of WSB ultimately called for the first ‘crusade’ against the short-sellers.
Between December and January, GameStop share prices remained relatively stable, fluctuating between 13p to 19p. However, in mid-January — after realising that the short sellers would soon need to close their positions — the Redditors began to rally again and collectively bought GameStop stock in huge numbers, triggering a ‘short squeeze’ and subsequently forcing the short sellers to buy these shares at a higher price to be able to close their positions.
The price of GameStop shares jumped from 19.95 USD on 12th January to 35.50 USD on the 15th January, just three days later. However, this was only the beginning; the share price of GameStop continues to increase, going from 76.74 on the 25th to a whopping 345 USD on the 27th.
Short sellers were blindsided by this coordinated price movement and were forced to fold with a collective loss of USD 13bn. Moreover, unable to handle the influx of new trading orders for GameStop, some high-profile brokers such as Robinhood and Trading212 stopped accepting new clients and limited the trading of these shares.
Tesla CEO and cryptocurrency enthusiast Elon Musk, who had also battle against Gabe Plotkin praised the Redditors’ victory with a tongue-in-cheek congratulatory tweet, simply exclaiming ‘Gamestonk!’.
Meanwhile, the US White House continues to keep a close eye on the situation, worrying that this unexpected level of retail trading activity will trigger instability in the market.
Aftermath
It is commonly believed that no matter your background, you generally enter the financial market for the sole purpose of attempting to make a profit; what makes the battle of GameStop a strange case , therefore, is that the motive was not purely monetary.
Multiple posts on Reddit discussed how the targeting of GameStop felt personal for them, noting that after experiencing the 2009 financial crisis they were not willing to see another beloved company destroyed by the ‘greedy financial corporations’ such as Melvin Capital.
As one Reddit user explained:
“To Melvin Capital: you stand for everything that I hated during that time. You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage.
“Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished.”
After this incident, it would not be surprising if investors, both retail and professional, begin to pay more attention to Reddit and other online discussion forums when trading — which in turn, perhaps, could mark the beginning of a new era of a more democratised form of financial markets.
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