by Ben Millard
First of all, one must enter the mind of a Reddit investor. For those who do not know, “Reddit … is a social news aggregation, web content rating, and discussion website. Registered members submit content to the site such as links, text posts, and images, which are then voted up or down by other members.” (Wikipedia). The construction of Reddit is similar to that of Facebook groups, where users share content that is relevant to the group or Subreddit. The Subreddit r/wallstreetbets, sees amateur investors bounce ideas off of one another about how to make a quick buck from the stock market. You might think that this sounds very sensible, but the mentality is more gung-ho, like a group of skateboarders telling their friends to “send it”. One popular term that is often used by these investors is “YOLO” (You Only Live Once) which nicely frames the sort of rationale that they use: put all of your savings into one stock and pray that it goes up. If a Wall Street investor was caught out using this sort of approach, they would risk their job and future career. By putting all of their eggs in one basket, the Reddit following investors’ risk is exceptionally high compared to a diverse portfolio of companies, where risk is spread over multiple firms and industries. I think that this shows perfectly the frenzied and speculative mindset of these Redditors: go big or go home!
The next piece of the puzzle is Gamestop itself. The firm sells hard copies of video games at its stores throughout the world, a business model which has undoubtedly been impacted by COVID 19. But the struggles that it faces today can be traced back to 5 years earlier, when Sony and Microsoft started selling digital copies of games for the Xbox and Playstation, making Gamestop and stores like it mostly redundant. This was noticed by a handful of hedge fund managers who positioned themselves against the stock by short-selling: they sell borrowed shares, anticipating buying them back again at a lower price to make a profit.
r/wallstreetbets found out that hedge funds were aggressively shorting Gamestop shares. They refused to believe that the company that had provided them with so many childhood memories, was predicted to go bankrupt. Instead of watching the share price fall further, they decided to band together and buy as many shares as they could. Millions of Redditors saw others buying the stock and decided that they should buy too, just for the meme. Demand shot up, increasing the share price massively. On the first day, the price doubled, making these early amateur investors a fair amount richer. But what about the hedge funds who bet on the price going down? Unfortunately, if the price goes up and you short-sold the stock, you make a loss as you have to repurchase the borrowed shares at a higher price than you sold them for… In this case, firms such as Melvin Capital lost billions of dollars, all because of a tidal wave of demand that flowed from ‘meme’ created by Reddit investors. And yes, you read that correctly, billions of dollars. So if someone has lost billions of dollars, it would be fair to assume that, in aggregate, billions of dollars were made somewhere else. This can be seen in the returns of one particular Reddit user. Their portfolio, composed of 100% Gamestop shares, had a return of over 4000%, amounting to just over $33 million as of 27th January. This is probably the largest holding of GME by an individual but if you imagine tens, if not hundreds of thousands of smaller portfolios, you can see that the potential returns are enormous, and fuels others to join in the game
But was it all as innocent as it appears? On the surface, as stated previously, it seemed that some people just did not want to let Gamestop die and could not stand for others betting on its downfall. However, there is a bitterer, darker side to these investors that is not so obvious to the naked eye. In a Reddit post by u/ssauron, one of those who invested their savings into GME, they say that their investment was fuelled by hatred of hedge funds and other institutional investors because of the damage they did during the financial crisis of 2008. They accuse these firms of manipulating markets to their advantage both then and now, meanwhile making ordinary people who have invested savings far worse off. In this way, u/ssauron and countless others tried to give Melvin Capital a taste of their own medicine by having ordinary people manipulate markets so that the institutions they despised made embarrassing losses.
U/ssauron’s claim that some hedge funds manipulate markets is not totally unjustified. In an interview over 10 years ago, hedge fund manager Jim Cramer openly stated that he, and many other managers, actively manipulate markets to get a short term return when they need to hit short term performance targets. While seemingly insignificant for these managers, just imagine if you had a decent slice of your savings in a stock that was targeted by Wall Street vultures.
Perhaps one of the most controversial stories that arose around Gamestop was that of Robinhood, a fast growing on-line trading platform that many people use day-to-day to buy and sell shares, including the people investing from Reddit. When the volumes of Gamestop shares being traded exploded , Robinhood suspended investors’ ability to buy them, causing an enormous uproar in the Reddit community; so much so that one customer filed a class-action lawsuit against the app. It reads: "Robinhood's actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood's customers". These accusations somewhat echo those against the hedge funds. This is particularly ironic because not only is the name of the app Robinhood but their slogan is “Democratizing finance for all.” To me, suspending trading in a free market does not sound all that democratic.
A few r/wallstreetbets users have hypothesised a wider conspiracy that the market is rigged against individuals so as to benefit a cartel of hedge funds who ultimately control the market. On the opposite side of the argument are those in support of Robinhood’s decisions. Some speculate that it would have been irresponsible not to suspend trading as the share price of GME is likely to revert, reflecting the tough financial position of the underlying company. Robinhood may have been blamed for the losses that would follow. But this is a weak argument as I believe that Robinhood’s move to suspend trading was unjustified because the market normally allows for anomalies and bubbles. There are many other overvalued or speculative investments permitted in the market, yet brokers and regulators do not get involved.
Robinhood’s official line was that the suspension reflected ‘‘volatility’ in the market. Volatility always exists to some degree, raising the question of where is the threshold for volatility so that they suspend trading. Should this sort of restriction be permitted in a free market? Well, it appears that Robinhood actually has a valid excuse. In an interview alongside Elon Musk, Robinhood CEO, Vladimir Tenev, was asked to “spill the beans” about why his company had suspended trading. He explained that Robinhood’s clearing agency (a middle man of sorts between buyers and sellers in the stock market) required them to make a deposit of $3 billion in order to settle the large volume of trading during the day. They suspended trading while they tried to raise sufficient funds. In the days that followed, Robinhood’s own shareholders managed to generate the extra billions of capital needed to fulfill the deposit but trading still did not resume back to normal levels, restricting users’ freedom to trade. In this sense, Robinhood’s move to block and limit trading seems justified but its users fell foul of it being a smaller player in financial markets, not having the financial clout to cope. The resentment for the app still lingers and many users have already switched to other trading apps like eToro and Trading212, hoping for a different experience.
In terms of the wider market, the repercussions have already begun. On the day of writing, 1st February, the hunt continues for the next hedge fund victim, and the price of silver has soared to an eight-year high thanks to the so-called ‘Reddit army’ piling in. Hedge funds, fearful of being caught out by them, have reportedly been reining in their bets. So who is to say that the vigilantes will not carry on? Fuelled by rage against hedge funds and other market manipulators, or even just those who want to make a quick bit of cash, it appears that the gaggle of r/wallstreetbets investors are going to continue to make an impact on the market for some time.
See, also, James Burkinshaw on how Meme Culture revolutionised American politics
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