How Meme Stocks Are Upending WallStreet

The global stock markets have been rocked by a wave of retail investors targeting hedge funds through a small group of almost penny stocks. The stock that sparked this movement is GameStop [GME] a chain of brick-and-mortar video game retail outlets that had been decimated by changes in the industry prior to the global pandemic.  Online competitors like Steam and console manufactures proprietary online stores, are having a similar effect on brick and mortar gaming retailers similar to the effect Amazon had on brick and mortar bookstores. 

The massive increase of over 1700 percent in GME jumped from a low of $2 USD to over $450 USD per share in a short period of time, something that has never occurred in the stock market.  At one point the massive amount of trading almost pushed GME into the S & P 500.

At the heart of this is a tech-savvy group of retail traders from an online forum or subreddit on the website Reddit.com called r/WallStreetBets.  The administrators of the r/WallStreetBets subreddit describe themselves as “if 4chan found a Bloomberg Terminal”.  4 chan is an anime enthusiast bulletin board created by a 15-year old that is similar to Reddit that has become massively popular in recent years.

This Reddit community r/WallstreetBets has managed to mobilize its user base too, in their minds, defend GME by a massive purchase of the stock to drive the value up significantly. They justify their motive as targeting parasitic hedge funds trying to intentionally devalue the stock and destroy the company through heavily leveraged short-selling positions. 

A short position is when an investor borrows stock from another investor with the expectation that the price of the stock will drop. More on this here. 

Parasitic short selling has real-world implications as it can cause companies to plummet in valuation, then struggle to raise capital which filters down and can result in thousands of job losses.

However, it seems the r/WallStreetBets has turned the tables on overly leveraged hedge fund positions. By mobilizing a massive buy of the stock the hedge fund at the centre of the controversy Melvin Capital has found themselves massively out-of-the-money on this short position and now has to panic buy the stock to meet their obligations.  This is termed a short squeeze because their own panic buying also helps drive demand for the stock and increases the price. 

This has already caused Melvin capital to borrow funds from other hedge funds and is having a ripple effect already causing $70 billion in losses for the hedge funds involved in this massive position and talks of insolvency.  Melvin Capital has even communicated with the federal government that they may require a bailout.  

It is not certain if the motivations for GME were beyond financial.  It is believed that many members of r/WallStreetBets were “gamers” (video game enthusiasts) who likely frequented the retailer in their heyday during the 1990s and 2000s. Now r/WallStreetBets has expanded to other stocks such as Tootsie Roll Industries (TR), BlackBerry (BB), AMC Entertainment (AMC) and has even allowed AMC to escape bankruptcy due to the rapid cash injections. All of this while Melvin Capital lost over 50 percent of its funds as its margins were called.  

In response to the open free market purchase of securities like GME what some call the unthinkable happened.  Trading platforms such as Robinhood, TD Ameritrade, Webul and others shut down the buying of these stocks; although users were still allowed to sell shares they already owned.  A move which many criticized as defending the hedge funds and illegal.  In the case of famed entrepreneur and investor Dave Portanoy of Barstool Sports he indicated in an online video that “these people should all be in jail.” Protnoy announced that he was forced to sell his position at a loss of over $700,000 because the inability to sell GME artificially drove the price of the stock down significantly.  

Robinhood describes their goals in its mission statement:

At Robinhood, we believe the financial system should be built to work for everyone. That’s why we create products that let you start investing at your own pace, on your own terms.

One issue many brought up is Robinhood’s financial ties to Citadel Securities, a hedge fund that also has a large stake in Melvin Capital, the very firm being targeted by the reddit traders.

This has many accusing Robinhood of market manipulation, though the CEO has made multiple public appearances explaining why the decision was made. Though some of his stories appear to contain some conflicting information.

CNN’s Chris Cuomo, in a strange act of what appears to be real journalism, uncovers many of the flaws in Robinhood CEO Vladimir Tenev’s story in this interview:

In the end, it appears as though the Reddit users were still able to come out on top in the fight for GameStop, time will tell what other brands will be hit. 

One thing is certain, this seems to be just the beginning.  In the final week of January 2021, the r/WallStreetBets subreddit grew from 2 million users to 8,412,533 at the time of this publication. Game on.