Three of the best performing publicly traded assets in 2021 are a flagging video game retailer, a movie theater chain on the brink of bankruptcy and a dog-themed cryptocurrency.
There’s no punchline, but it appears right now that the users of discussion website Reddit - known as Redditors - are laughing all the way to the bank.
The Reddit forum r/WallStreetBets last week began encouraging people to buy GameStop stock to hurt the stock's short-sellers, which included some of the biggest hedge funds in the US. The viral rallying cry, which sent ticker GME soaring more than 1,800 per cent year-to-date to $325 by the market close on Friday, resulted in billions in losses for GameStop short sellers.
And the ripple effects are ongoing.
Not about making a statement
But this saga began unfolding online long before the short squeeze took hold and captured international attention. Prior to this, the Reddit forum had less than half as many users and no anti-establishment agenda.
One WallStreetBets user told The National that "this was never about pumping the stock. It wasn't a cause, nor was it even about making any kind of political statement".
Instead, it was a stock pick like any other made in a day trading culture that increasingly looks more like gambling than investors looking for serious, long-term returns.
Robinhood, the stock trading app founded in 2013 and worth an estimated $11.7 billion, disrupted the day trading industry, making zero-commission buys the norm and pushing competitors like E-Trade and Schwab to follow suit.
But daily trading activity on Robinhood has far exceeded that of its competitors, where the stock pickers skew younger - the average age of a Robinhood trader is 31 - and where investment decisions are made with a couple clicks on a smartphone.
In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to an analysis done by Alphacution and The New York Times in July 2020.
This phenomenon took off further amid the Covid-19 pandemic which kept millions of Americans in their homes, many in financial straits, and looking for a fix.
The man who inspired this Wall Street bet, Keith Gill, has been talking about GameStop since July 2019, as Roaring Kitty on YouTube and an unprintable nom de plume on Reddit.
He argued that the share price, hovering around $4 at the time, was undervalued as the brick and mortar retailer stood to reap the rewards of new generations of lucrative gaming consoles and a push to e-commerce.
For more than a year, no one really listened. The stock price remained flat.
But amid a sales lift spurred by new gaming consoles, and activist shareholder Ryan Cohen picking up a 13 per cent stake in the company in December, the stock began heating up.
Ask Redditors when the tone changed and they will point to January 13: when GameStop shares shot up from $19.95 to a high of $38.65, sending short sellers scrambling to cover their exposure.
The stock’s rocket ship ride incensed legacy investors who opined in the media that the rush on GME stock counted as market manipulation.
"The wonderful irony of this situation is that their widespread effort to bash the stock through the media only served to attract more attention, plunging them into a vicious cycle that we've all seen play out over the past two weeks," one Reddit user told The National.
“Before January 13, this tug of war between the shareholders and the short sellers had been a matter of little importance in the financial world.
Now, we've reached a point where GME's ongoing squeeze is sending waves across the broader market, and we're all starting to see just how dangerously vulnerable some of these major hedge funds are.”
A naked short?
But it wasn’t just that the Redditors exposed weakness. Instead, they exposed a naked short, which is illegal.
Typically, before selling a stock short, a trader must borrow a stock or determine that it can be borrowed. But naked shorting refers to short pressure on a stock that may be larger than the tradable shares that exist in the market. Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems, according to financial site Investopedia. GameStop was shorted as much as 140 per cent at one point last week.
'Let's teach them a lesson'
The message on WallStreetBets became: “We need to like the stock so much that gets to a point where its [sic] too expensive for ANYONE to bail them out.”
Another Reddit user told The National that this has become about teaching short sellers "a lesson they won't soon forget".
“Would I pay $100, $200 or more for a GME share under normal circumstances? Probably not. But knowing these hedge funds have been caught with their pants down makes it justifiable … the regulators need to launch an investigation into the practices of the short sellers in order to figure out why a short interest greatly exceeding 100 per cent came to be.”
The Securities and Exchange Commission said last week it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity”.
GameStop was priced at $325 a share, with a market cap of $22.67 billion when the market opened on Monday.