Stocks

Reddit's GameStop rush (doesn't) change(s) the stock market

7 minutes to read
Column
Nataliia Vdovychenko
02/02/2021

GameStop has shaken the stock market with the help of Reddit users, or at least that is wat the news suggests. What is certain is that for the first time in history, the news about stocks is talking about the 'online community' rather than the wolves of Wall Street. How did this shift happen, and what are the long-term consequences? 

GameStop's rise 

GameStop's story gained public attention with the help of Reddit. r/WallStreetBets is an online space where users all around the world exchange investment ideas. The GameStop affair started a few months ago when Reddit users saw an opportunity to make easy money and teach Wall Street a lesson (Evans, 2021). Initially, they believed that hedge funds were shorting GameStop's shares (Phillips & Lorenz, 2021). On January 11th, 2021, the community started buying GameStop shares, seeing an optimistic future for the company (Stam, 2021). 

"If enough buyers buy into a company and refuse to sell, the theory goes, that will drive the price of the shares higher. That, in turn, forces short sellers to fuel the price rise against their will by making them buy at ever-higher prices to cover their bets. The harder it is to find a stock to cover the short, the more expensive it will get, until momentum shifts" (Evans, 2021).

On the first day of the Reddit boom, GameStop stocks rose by 12% (Stam, 2021). This caused a battle between mainly amateur players and professional players. In this historic competition, however, the former seemed to be confidently leading. By January 14th, purchases on both sides caused the GameStop stock to rise 27% in just one day (Stam, 2021). 

Teach Wall Street a lesson it will never forget.

The unexpected influence of Reddit users has gained increased attention. On January 19th, investment firm Citron Research published a controversial tweet calling the GameStop investing enthusiasts "suckers at this poker game" (Stam, 2021). The statement only encouraged Reddit users, leading to increased public shaming, trolling, and threatening of Citron Research. Andrew Left of Citron Research later published a video with a rather apologetic tone of voice. He claims that 20 years ago, Citron Research was established to protect individuals from Wall Street: "When we started Citron was supposed to be against the establishment. We've actually become the establishment" (Left, 2021). The firm announced that it will no longer publish short-seller research, focusing on pieces with a long-sided focus. 

On January 22nd, Redditors started celebrating as the stock jumped 51% (Stam, 2021). r/WallStreetBets enthusiasts promise that this is unprecedented in the history of the stock market and that more is yet to come. 

Figure 1: Th performance of GameStop stock from 04.01.2021 to 28.01.2021.

In the days leading up to January 28th, both the stocks and the Reddit community kept on rising. r/WallStreetBets reached 5,2 million subscribers and was forced to go offline for a short period of time to catch up with the volume (Stam, 2021). However, January 28th was a turning point. Robinhood and several other broker platforms restricted trading in the GameStop stock (Stam, 2021). Little did they know, this immediately set off a social media backlash, bringing even more attention to the situation. Robinhood later said that it would restore buying in limited amounts. 

Right before the market opened on January 29th, another key player entered the field. The U.S. Securities and Exchange Commission "wade[d] into the fray, warning brokerages and Reddit users that it [was] watching" (Stam, 2021). In the published statement, the organization claimed that it aims to protect retail investors from abusive and manipulative behavior, and that such trading activity is "prohibited by the federal securities laws" (The U.S SaEC, 2021). According to the Commission, it is closely monitoring the situation and market participants should avoid harmful behavior. 

The moment the market opened, GameStop shares resumed their growth, leaping 113% which, in total, reached 400% a week (Stam, 2021). This had a devastating impact on short sellers. The research firm S3 calculated that they have already lost $5 billion on GameStop in less than a month of 2021 (Evans, 2021). 

"As long as the price goes down, short sellers make money. But when the stock goes up, short sellers have to buy into a rising market, which adds to the buying pressure, which pushes prices up even more in a vicious cycle for the short. That's known as a short squeeze, and what we're seeing right now may be the most dramatic one in history" (Evans, 2021). 

The wolves of Wall Street vs. 'the people' of Reddit

Various motivations have kept users engaged in the GameStop stock race: easy money, pandemic lockdown boredom, the gambling adrenaline rush, and simply a desire to teach Wall Street a lesson it will never forget and the digital culture of Reddit communities. If that lessons will be so profound as mainstream media claims is doubtful. Hedge funds operate on a different scale and the stock markets like to see cash flowing in. 

At the same time, some changes seem to be advocated for now. Observers all over the world have been shown the major troubles in the system. After manipulating the stocks for years, Wall Street now calls for tighter financial regulations when internet users cooperate to take over the market. Although short sellers failed to surrender despite the losses (Li, 2021), the Wall Street billions-worth of damages have demonstrated the overall fragility of the market. Some analytics claim that the U.S. Securities and Exchange Commission has, in the meantime, failed as a regulating organ (Washington Post, 2021). 

Figure 2: The online culture rhetoric of Reddit 'humiliating' or, as often used, 'trolling' Wall Street illustrated with the stonks meme man.

A group of enthusiasts can shake the market from their smartphones.

The Reddit stock market experiment has at least caused a cultural shift. Internet rhetoric over the past few days has revolved around 'the people' of different origins and backgrounds uniting to collectively 'eat the rich'. In the contemporary context, the anger of neverending class conflict is intelligently shaped into a group of enthusiasts making themselves visible from their smartphones. Taking revenge and getting back some of the 'taxpayers' money' is a populist call that resonates with millions worldwide. 

The mimicking attempts of Reddit's GameStop affair are now recorded all over the world with amateur investors uniting to influence the market. Certain r/WallStreetBets-inspired forums on Reddit, Telegram, Whatsapp, and Discord have called for coordinated buying of certain stocks (TheWeek, 2021). The latest attempts were spotted in India, where stricter regulations motivate users to find ways of creative unification to invest and successfully manipulate the market (TheWeek, 2021). Of course, it would be an illusion to think that such efforts will result in a takeover of Wallstreet, maybe on the contrary: more money flows into the stocks. 

The role of Reddit

The use of social media in stock market games is not a new phenomenon. In fact, investors have been using them for years with anonymous posts encouraging cryptocurrency pumps and dump scheme manipulations (Reuters, 2021). However, nobody was prepared for the wave of influence that r/WallStreetBets was about to cause. 

In the long run, the GameStop rush may trigger tighter regulations for both stock markets and social media platforms.

Using Reddit to coordinate investment activity appears to be in the grey area of both the platform's Terms of Service and the legal statute commonly referred to as Section 230. Reddit restricts discussions about drugs, violence, weapons, and other illegal activity (Reuters, 2021). Reddit's policy reflects Section 230 which states that "social media companies are generally not liable for user activity" (Reuters, 2021). Therefore, while lawfully social media platforms are obliged to restrict illegal behavior such as drug and gun transactions or distribution of offensive and violent content, they are not responsible for groups of amateur investors collectively deciding what to do with their money (Reuters, 2021). 

In the long run, the GameStop rush may trigger tighter regulations for both stock markets and social media platforms. However, this might not prevent users from continuing to invest. The collective market influence might just be pushed to the margins of the internet where users can run schemes in closed chats with untraceable accounts. 

The stock rush that did not shock Wallstreet

While the battle of Wall Street versus Reddit narrative rages on, the internet has divided into camps. Some keep investing, believing in the collective uprising and revolution GameStop has brought to the masses. Others participate for fast profit or observe the situation from a critical distance, fearing how this 'short-term' win will tighten regulations. Whatever happens, it is clear that none of those parties will not take down Wallstreet or hedgefunds. 

The GameStop case will definitely change the world of investment and the way social media are used.

 

References

Evans, P. (2021). Why a Reddit group pumped GameStop shares up 1,000% on a lark. CBC News.

Left, A. (2021). Citron Research discontinues short selling research to focus on long opportunities. Citron Research YouTube channel. 

Li, Y. (2021). GameStop short sellers are still not surrendering despite nearly $20 billion in losses this month. CNBC. 

Stam, A. (2021). Timeline of a Crisis: WallStreetBets/r and GameStop. PRWeek.

Phillips, M. & Lorenz, T. (2021). ‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game. The New York Times.

Reuters. (2021). Citron Research discontinues short selling research to focus on long opportunities. Retrieved from CNA Insider.

TheWeek. (2021). With GameStop, a group of amateur investors upended Wall Street. Now, similar attempts reported in India. 

U.S. Securities and Exchange Commission. (2021). Statement of Acting Chair Lee and Commissioners Peirce, Roisman, and Crenshaw Regarding Recent Market Volatility. 

Washington Post. (2021). GameStop mania exposes SEC's failure as regulator.