On the first Wednesday in January, America saw an insurrection. The second, an impeachment. The third, an inauguration. And on the fourth Wednesday in January, everyone got real fired up about a video game retailer’s stock price.
When the market closed on Wednesday, GameStop — a beleaguered chain of video game stores with more than 5,000 locations worldwide — was trading on the New York Stock Exchange at $347.51 a share, up 135 percent for the day. That made GameStop stock more valuable per share than Apple, ExxonMobil, or Facebook. The ride on Thursday was even wilder, as the stock whipsawed between massive gains and major losses.
It’s a wild financial story, but at some point it became more than that, jumping news genres like a cross-over country hit and becoming a national fixation. In an age of pandemics, impeachments, insurrections and new presidents, the hottest topic in news was… investing in a video game store most commonly found flanked by the Gap and Sunglass Hut.
That’s because the GameStop story isn’t really about stocks. It’s the story of the economy we all live in; a winner-take-all death sport where the same team always wins. When I started writing this on Wednesday evening, I thought I was chronicling how internet virality can upset that balance — if only briefly. By Thursday, it was the story of just how far powerful people would go to prevent that from happening, even once.
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And then it got even weirder.
GameStop, Reddit, and Hedge Funds, Explained
For the past five years, Gamestop has looked a lot like other brick-and-mortar retail businesses: a former success of the “hanging out at the mall” era that was now struggling in the age of e-commerce. The company got a shot of good news in 2020, when it saw a jump in online sales and an investment from a guy who’d had success in online sales of pet supplies, and GameStop stock ended the year worth about $20 a share. And then, in mid-January, it took off like a rocket.
That’s where the Reddit crew came in. Posters on the subReddit r/WallStreetBets took notice that one of their peers — who, naturally, goes by the name “DeepFuckingValue” — was getting a big return on his early investment in the retailer. After a few “gain-porn” posts (screengrabs of how much money someone has made) other Redditors jumped in as well, and the climb started to accelerate. But for the redditors, it was more than just an investment. It was a protest buy against the hedge funds that had “shorted” the stock, a financial maneuver that allows them to make money by correctly predicting when stocks will drop in value.
The effort was further fueled by the r/WallStreetBets community, which exerted social pressure on its users to “hold the line” and not sell shares, regardless of their price. Investors purely thinking of financial gain may have sold their position once the stock had doubled or tripled in value (an impressive feat in and of itself for a company as maligned on Wall Street as GameStop). Typically, as a few sellers become many, it creates a self-fulfilling prophecy as people rush to get out. But the social power of redditors urging each other to keep holding — cheering for “diamond hands” who hung on and shaming “paper hands” for bailing out — was enough to keep enough redditors in to push the stock to its stratospheric Wednesday close.
As GameStop’s stock soared, some on Wall Street cried foul, claiming that Reddit users’ coordinated effort to buy the stock amounted to market manipulation. Traders “are making no effort to conceal their apparent intent to manipulate the price of the stock,” Daniel Hawke, the former head of the Securities and Exchange Commission’s market abuse unit, told the Wall Street Journal. And while the SEC said Wednesday they are “actively monitoring the ongoing market volatility,” experts defending the practice say there’s nothing illegal about showing exuberance for a stock and that proving manipulation will be exceedingly difficult. To many, it was a solidarity sling in action; enough to throw a rock right through Goliath’s fucking forehead.
GameStop’s Reddit-fueled surge came to a head earlier this week when Melvin Capital, one of the big-money hedge funds on the other side of the GameStop stock equation, reportedly needed a cash infusion because of its massive GameStop losses. Melvin had ridden a strategy of aggressive short selling to manage $12 billion-plus in assets at the start of the year, per the Wall Street Journal.
But the risk of shorting stocks is that if they rise, there is no limit on how much you can lose. When you typically buy a stock, your loss limit is only the total amount you’ve invested, e.g. if the stock theoretically hits zero. When you short it — betting that the price will go down — every dollar it goes up is a dollar you end up owing later. Melvin had bet heavily against GameStop and was bleeding cash until it finally managed to close its position on Wednesday. The company hasn’t said how much it lost, but it was enough that Melvin needed a $3.5 billion cash infusion, per CNBC and others.
With other hedge funds also deep into bets against GameStop, it seemed like there was no limit to how far this thing could go. And then we all learned a thing or two about how, in today’s America, financial markets really work.
The (Reverse) Robinhood Maneuver
The internet investors who meme’d a hedge fund into the fetal position got more attention, and the scrutiny came with near-immediate consequences.
The first domino to fall was the r/WallStreetBets Discord server, a place where groups can gather to chat. But Discord abruptly booted r/WallStreetBets Wednesday, saying the move had nothing to do with the GameStop affair but because the room was allegedly a hotbed of hate speech. In a subreddit post, community moderators argued that they’d tried to police such speech through a program that blocked certain words, but a few bad apples in a community of 250,000 had found a way to post hateful content anyway. Many redditors countered that Discord’s boot had everything to do with GameStop. You can choose whom to believe, and it’s possible the truth is somewhere in between, but the timing is suspicious: Discord’s own statement said they’d seen the offending content before, but the hammer didn’t fall until Wednesday. GameStop kept climbing even after the Discord incident, and by 10 a.m. Thursday morning, it was trading at a near-unfathomable (and nice) $469.
It was about that time that Robinhood, an online brokerage popular with individual day traders, announced it would no longer allow people to buy GameStop and a dozen other stocks redditors had successfully skyrocketed. (Investors could still sell their position.) Allowing a large group of people to only sell a stock creates an artificial downward pressure on its price, and it’s doubly questionable to have a situation where large funds with their own brokers can buy or sell the market’s hottest stock — but everyday investors can only sell it. Investors filed a class action lawsuit, and politicians from Alexandria Ocasio Cortez to Rashida Tlaib to an attention-thirsty guy from Texas protested the decision.
Why exactly Robinhood intervened will be a matter of Congressional scrutiny. The main accusation against the company is that it changed the rules to protect hedge funds. The company says the Reddit-fueled surge in trading volume had strained its cash reserves. (“To prudently manage the risk and the deposit requirements, we had to restrict buying,” Robinhood CEO Vlad Tenev told Chris Cuomo Thursday.) But the results of Robinhood’s intervention was obvious: GameStop tweeted out the purchase restrictions at 9:56 a.m. By 11:20, it had fallen from $469 to $126. Prices were all over the place for the rest of the day, but when trading closed Thursday, GameStop was down 44 percent to just below $200 a share.
If anyone tells you they know what’s going to happen Friday, they’re lying.
Why did this become a national obsession?
At some point during GameStop’s wild ride, it went beyond being the biggest story in finance to being one of the biggest stories period. And that’s because what happened — a group of Davids taking down a Goliath — isn’t just rare in the stock markets; it’s an aberration in any aspect of American and political life.
Take a look at the last 15 years of American economic history. In 2007, a housing bubble burst and led to a financial crisis that threatened to take down massive financial firms. The government rushed to inject public funding into those private companies on the grounds that if megabanks failed, the fallout would be devastating for everyone. That’s true, but it’s also true that it’s devastating to lose a house you were told you could afford, or to get laid off, or to see your retirement savings wiped out. And all of that happened to a lot of people in the Great Recession, but no such emergency help was extended to them. The banks were “too big to fail,” but individuals weren’t, and many of them did.
The post-recession recovery saw the rich again do far better than anyone else. The main economic intervention during that time came in 2017, when Trump and the GOP massively slashed taxes for corporations and the wealthy — and then got around to some meager tax perks for workers. A few years later, Covid-19 threw us into another global economic crisis. Congress and the Federal Reserve found astonishing amounts of money for banks, airlines, and other big companies that needed cash fast. For most people, help (so far) has come in the form of a temporary bump in unemployment benefits and two skinny stimulus checks over the course of a year.
You look back, and it’s a decade and a half of the U.S. economy alternating between two states: Good times when working people get by and rich people do really well, and crises when working people suffer and the rich people do really well. The government’s answer in all cases: Give rich people more money.
It’s no wonder that a certain slice of our society saw rich people coming out on the losing end and thought: Something isn’t right here.
The most egregious offender here appears to be Robinhood, but even before the Snitches of Nottingham got involved, there were a host of voices attacking the redditors while riding to the hedge funders’ defense. “People are sitting at home getting their checks from the government,” billionaire investor Leon Cooperman told CNBC in a widely mocked/criticized interview Thursday. “This ‘fair share’ is a bullshit concept and is just a way to attack wealthy people.”
A common complaint was that the share price of GameStop has become divorced from any assessment of the company’s financial future. That’s obvious, but it’s also a strange thing to bring up in the context of a stock market whose overall performance is untethered from the economic wellbeing of the American people. Sure it’s true that, in theory, the stock market exists to connect good business ideas with the capital needed to execute them. But that’s a comically naive assessment of a market that’s rife with high-frequency trading and arcane financial tools that allow a certain class of investor to make bank by betting on bets on bets on bets. And if Wall Street was really so concerned about cRAzY sPecULaTiOn, it could have used its massive congressional clout to push for more regulation, rather than fighting it at every turn.
When you boil down the complaints, it’s basically a lot of powerful people saying: “Those people are acting like we do! Stop them!”
The Redditors Aren’t Here to Save You
Given whom they’re up against, there’s a temptation to see the GameStop saga as a story of a heroic band of revolutionaries, but it’s not that simple. First of all, there are about a quarter of a million people posting on r/WallStreetBets, per the subreddit’s moderators, so broad generalizations in any direction are going to miss a lot of nuance.
It is clear, however, that while many Redditors invest small amounts relative to hedge funds, they’re hardly shoestring investors on the brink of destitution. DeepFuckingValue, for example, got his GameStop adventure started with a $50,000 investment. That’s the digital equivalent of couch cushion change for hedge funders and i-bankers, but in normal circles, those are DeepFuckingPockets. And it’s not just work-a-day traders making money off the GameStop bonanza. Market Insider reports that BlackRock, the world’s largest investment manager, was likely up $1.2 billion from the frenzy, as the company had owned 9.2 million shares of GameStop at the end of 2020.
There’s also the issue of the content in the Discord server, and the noxious voices who are looking to turn the redditors’ request that they not get hosed while trading into yet another debate about “big tech censorship” and “cancel culture.” And, because there’s a party on the internet, the Nazis have arrived, with shitposters putting up all sorts of bigoted bullshit about Jewish people and banks.
So was this all for nothing?
Yes and no. Regardless of how the Redditor vs. hedge fund struggle over GameStop works out, financial markets will continue sending wealth up the income ladder with breakneck speed. We’ll still live in a broken economy and see efforts to fix it thwarted by public servants in the thrawl of private donors. Inequality will still continue to grow in good times and grow by even more in bad ones. We’ll still be at the mercy of our insurance companies if we’re lucky enough to have jobs with benefits, or falling through a porous social safety net if we don’t.
But it’s noteworthy that even a day-long dim in the power of elite institutions was enough to turn the internet on its ear. Populism — in many strains — is ascendant in America, and officials in both parties can see it. It’s no coincidence that Republicans like Ted Cruz and Donald Trump Jr. were broadcasting outrage about Robinhood’s decision, and it’s telling that by Thursday’s end, House Democrats heeded demands from Ocasio-Cortez and Tlaib to schedule a GameStop-related hearing.
It’s possible that the next populist U.S. administration that succeeds will be the kind that wants well-funded schools and a sane health care system, as well as to dismantle systemic oppression of minorities and women. But the strain that emerges could look a lot like Trumpism: all the xenophobia, bigotry, and sabotage, but this time with a fig leaf of financial aid to favored in-groups. Republicans — whose principal allegiance is to the economic status quo — have little to offer in terms of material help, but “pay not attention to these massive corporate tax cuts, we promise we’re just as angry at ‘elites’ as you are” has been a successful message for them in the past.
Democrats have the inside track to pursue an authentic economic populism, as their caucus includes members who have bold proposals for reform. But the party, while pledging allegiance to those goals, frequently defaults to half-measures or runs away from the type of politics needed to make major changes happen.
One reason Democrats may be slow to respond to anger over the economy is that their preferred sources of news have a proven blind spot about it. That was on full display Wednesday, when the New York Times launched an ill-advised GameStop tweet about what the redditors were up to. “Amateur investors, perhaps propelled by a mix of greed and boredom, are looking to teach Wall Street a lesson,” the tweet read.
So close. The tweet correctly identifies that these people want to teach Wall Street a lesson but then goes looking — in all the wrong places — for a reason why. In America in 2021, wanting to teach Wall Street a lesson is all the propulsion anyone needs.