Several decades ago, the GameStop chain of stores was likened to the Lego of the United States, where children could find new gaming consoles, captivating game discs, and enticing board game sets. Those children, now grown, are active on a forum called Reddit, gathering under the self-proclaimed label of “autists”.
Contrary to its reputation, GameStop’s recent business situation has not been promising.
Until 2020, due to continuously declining sales, the company’s stock was considered outdated.
The story began when GameStop appointed a new CEO, Mr. Ryan Cohen. Shortly after, Citron Research, a professional short-selling firm, predicted a significant drop in the company’s stock price. However, members of the Reddit group r/wallstreetbets, who were interested in this stock, criticized Citron and consistently praised GameStop’s stock on social media.
The intensity of the r/wallstreetbets group created a situation known as a “short squeeze” for GameStop’s stock. The short squeeze can be described as follows: Some investors believe that a particular stock will decrease in value. Therefore, they borrow that stock from other investors and sell it, intending to buy it back at a lower price to return the stock to the original owner.
However, the problem with short selling is that one person’s loss can trigger a chain reaction to others. If a stock starts to rise significantly, some short sellers will have to abandon their plans to short sell and buy back the stock at a higher price to return it. This, in turn, drives the stock price even higher, burning the pockets of other short sellers who still hold the stock, forcing them to buy back at an even higher price to cover their losses.
Perhaps, when hedge funds targeted GameStop, they did not anticipate the current situation: a $20 billion loss in the first short squeeze with 10 hedge funds collapsing. As of last week, GameStop’s stock witnessed a 400% increase, and within the month, it exceeded 1,600%.
The panorama of the seismic shock happening on Wall Street: ‘Internet young bulls’ overpowering seasoned sharks, driving a stock up 400% in a week just through memes and humorous charts.
Unfortunately for the hedge funds, aiming at GameStop also meant targeting childhood, touching the most sacred parts of a devoted group on Reddit.
At this moment, the Reddit enthusiasts are willing to put their last cents into GameStop’s stock. For them, losing money is nothing compared to what they lost during the 2008 financial crisis, as their motto goes, “hold to die”.
Unprecedented in history
The WallStreetBets members have their own language. Financial terms are combined with internet language, famous memes making it easy for newcomers to get lost.
The content is diverse, ranging from memes to make viewers laugh, screenshots of unbelievable profits and losses, to in-depth stock analysis. They are presented with a humorous language, as if one wants a serious understanding of stocks on Reddit, they can visit r/investing.
However, the recent stock market results show that a group of seemingly mocking individuals can indeed change the market.
“These guys can really impact the market”, commented Jeremy Blackburn, a computer science professor at Binghamton University.
Lana Swartz, a media studies professor at the University of Virginia, believes that the fun and relaxed nature of WallStreetBets is what attracts the forum’s participants.
“People with a lot of money understand that money can come and go, but in general, they don’t have much value. Understanding that is how they have a lot of money. That’s the spirit of WallStreetBets”, she remarked about the community’s mentality.
“They also don’t care about making money; what they want is the experience. When you bet on a stock, you can make a profit, you can also incur losses, but the important thing is that you’ve placed a bet in a crazy way”, explained Mr. Blackburn further.
With that mindset, WallStreetBets investors are ready to take risky bets, using all their money, even using financial leverage to bet on high-risk stocks.
“It’s kind of scary, isn’t it? Because money is still real. When you care more about the process than the results, that’s really dangerous”, Mr. Blackburn noted.
The battle of “little fish” against the super-rich
GameStop has become the focal point of a class war, between 99% of ordinary people and 1% of the super-rich. That’s why shorted stocks like Nokia, BlackBerry, or AMC have experienced a rapid increase in the stock market.
This unprecedented battle has attracted the attention of many politicians, billionaires, and other celebrities. Elon Musk is the most actively supportive figure, but there are many other silent supporters. Specifically, the GameStop stock’s rise intensified when billionaire Elon Musk shared a link to WallStreetBets with the comment “Gamestonk,” implying that Wall Street investors made a wrong decision.
On the opposing side, billionaire investor Leon Cooperman called this incident a “rich people attack” and threatened that it would end in tears. Another billionaire investor, Steve Cohen, even had to delete his Twitter account because Reddit users were seeking him out.
At this moment, Melvin Capital is still in the short-selling battle with GameStop’s stock.
The fund continues to be funded by Point72 and Citadel LLC with an amount of $2.75 billion in a battle where GameStop’s shorted shares have reached 140%, more than 40% of the total shares issued by the 37-year-old gaming company.
Citron stated that they would not comment on GameStop’s stock anymore because “an angry mob owns this stock.” Citron Research’s editor, Andrew Left, mentioned that the recent intense reaction is a criminal act involving both financial crime and harassment of minors, and he plans to report to the SEC.
For its part, the U.S. Securities and Exchange Commission (SEC) took official action last Friday, issuing a warning to brokerage firms and online traders to be vigilant about any improper behavior in this high-speed trading activity.
The summary of the showdown between the Reddit community and large hedge funds through the GameStop Short Squeeze event is a vivid illustration of innovation and solidarity in the financial world. Transparency and fairness in the market have become motivating factors for small retail investors, enabling them to form a powerful force capable of challenging the dominance of major players. The lessons from this event are clear.
Firstly, the battle highlighted the power of community and the societal influence in market decisions. The r/wallstreetbets group on Reddit demonstrated that small retail investors, when united and focused on a goal, can bring about significant changes and even reverse the flow of the market.
Secondly, the event serves as a warning about the necessity of transparency and risk management in the financial market. Short-term trading and short-selling strategies faced unforeseen consequences when stock prices surged abruptly, creating a situation of “short squeeze” that was difficult to control.
Lastly, the GameStop Short Squeeze has prompted a reconfiguration of the relationship between retail investors and large financial institutions. This could lead to regulatory changes with the goal of creating a fairer and more transparent financial market for everyone.
In conclusion, this showdown is not merely a historical event in the financial world but also a lesson on the importance of transparency, unity, and innovation in building a sustainable and equitable financial market.
By. Pham Thanh Bien
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