Shares of GameStop, a video game company, rocketed as much as 1,600% over a few weeks in the tail end of January when investors on the Reddit
and elsewhere ganged up on institutional investors who were betting that the stock would go down. The rebellion has ebbed and the finger pointing has begun but while GameStop was at its peak, it opened a stunning new flank in the notions of how financial power operates on Wall Street. The initial headlines followed the David vs Goliath storyline, but the explanations are getting more muddled as new information trickles in. No matter which angle we examine this story from, it is at once novel and educative. What happened on the markets is as fascinating as the technological and cultural elements that went into it. Did a flailing video game retailer go “to the moon” entirely on the back of a Reddit-backed online mob of cheerleaders with a particular affinity for expletive-laced chatter? As the dust settles and knowledge around the phenomenon evolves, this article focuses on headline themes emerging at the intersection where Wall Street’s market makers, retail investors, social media platforms and algorithmically mediated trading apps collide.
The numbers
If you have time for nothing else but the numbers, here is how they stack up. Shares of GameStop went from US $17 at the beginning of the year to US $483 in the of four weeks. At the end of January, GameStop was the most shorted US stock, with nearly 90% of its shares having been sold short (where hedge funds bet that it would lose value), according to FactSet. WallStreetBets, a Reddit board big on GameStop, had just over 800,000 members a year ago. By the first week of February 2021, it had 8.4 million subscribers. . The struggling video game retailer closed Friday, 5 February, at US $63.77, down 87% from its intraday peak on January 28. A former Goldman Sachs banker, who sits on the House Financial Services Committee
that “sadly, the most effective remedy for that sort of thing is touching a hot stove.”
The hot takes
The initial hot takes on GameStop swirled around constructs like ‘amateur vs professional’, ‘David vs Goliath’ and so on. A lot of philosophers were minted, millionaires were far fewer, and the mechanics of money-making on pure trading plays were more nuanced than the breathless reportage on the stock’s volatility in real time. Hedge fund managers lost and won big. Small investors learnt a great deal. When the stock surged from less than US $10 a share to above US $400, Senvest Management LLC was sitting on a neat US $700 million, while half of Melvin’s US $13 billion fund had been wiped out.
, analysts at Barclays Capital wrote that the GameStop episode is “a wake-up call that is likely to permanently affect the business models of institutional investors.” Financial analysts say oversold stocks are typically ripe for a hit precisely because they’re oversold. What’s different in the GME case is the way crowds coordinated online and added an entirely unexpected dimension when they moved in for the attack. “It messed up the zero-sum calculations that hedge funds are so comfortable with,” said a Connecticut based hedge fund professional, on background.
The underdogs
GameStop hasn’t been the only David in this David versus Goliath storyline. There are others like AMC Entertainment, but GameStop has become the poster child for a battle where hedge funds short stock (bet it will fall) and the resistance, including small investors, props them up. Redditors, who have been a visible force in fuelling the surge in a clutch of stocks heavily shorted by hedge funds, remain in a combative mood. GameStop’s gains rode on the back of competing narratives between retail investors and big institutions. , told ORF he disagrees with the big media outlets framing retail investors as folks who are fuelled by “boredom and anger”. In his view, “this whole thing started because a few users, a while ago, thought the company was undervalued at a few dollars a share and saw growth opportunities with new board members and new consoles launching. The shorted stock and sticking it to the hedge funds thing is all pretty new, I mean, we’re talking stocks—the goal is to make money.” Mike bought at US $30, sold at US $31, says he “kicked” himself for exiting too early and bought some more when the hype began. How did that go? We asked him. “Accomplished nothing!”, came the answer. Another Reddit regular like Mike—a pilot who hails from Virginia—told us, over chat messages on Reddit. “It’s sad really. The initial stories of ‘taking on Wall Street’ are romanticising the whole thing.” He didn’t buy because he didn’t think it was worth the time to try and call the peak. Others, like Reddit user Lumberjack1067, from Michigan, went all in. “I bought in at US $350 so I really only have four shares. I had split my money between GME and . It was literally everything I could throw at it. I get paid next Friday so I plan to buy more if I can,” he said. Typical caricatures of the so-called little guy or the bad guys don’t quite capture the essence of what really motivates people to take the plunge or hold. On the other side of Wall Street, there’s a healthy respect for the resistance, born on online platforms and elsewhere. “More democracy in the marketplace is kind of a cool thing... it’s refreshing, I’ve kind of enjoyed it,”
The face of the resistance
Sporting shoulder length hair and a bright bandana, Keith Gill, 34, who goes by “DeepF—ingValue” on Reddit and “Roaring Kitty” on YouTube, is being hailed as a hero of the populist investor revolt that drove GameStop’s share price to staggering heights. Contrary to his characterisation by CNN and other newsrooms as an “amateur”, Gill holds sophisticated licenses to trade on Wall Street. The Massachusetts resident is a legend on Reddit’s WallStreetBets forum, which has become a hotbed of tough guy memes on beaten down stocks. Gill’s YouTube channel Roaring Kitty (also the name of his Twitter handle) has more than 400,000 subscribers. Gill posts screenshots of his brokerage accounts and talks for hours on end on his YouTube feed. “This story is so much bigger than me,” he told the
in his first interview since GameStop surged. “I support these retail investors, their ability to make a statement,” he said about the Redditor army cheering him on. A recent seven-hour
YouTube thesis by Gill from his basement studio cum office which begins with a mashup of cat visuals and then dives into stock charts has clocked more than 800,000 views by February 7. Whoops of, “If he’s still in, I’m still in,” from devotees of his Roaring Kitty YouTube channel have exploded on the comment thread. Gill, who’s made a killing with GME, plans to buy a house and maybe even indulge his long-time dream of sticking an indoor track facility inside it.
The scrutiny
The regulators are coming for ‘Roaring Kitty’. Keith Gill is under investigation in his own backyard. Gill is facing an inquiry from a Massachusetts regulator over potential conflicts of interest because of his work as a licensed securities broker and “financial wellness education director” for insurance company MassMutual. Gill’s last day on the job was January 28, but he was posting hours-long videos on GameStop’s potential well until January 22. Congresswoman Maxine Waters, chairwoman of the House Committee on Financial Services has set up a February 18 hearing with an instructive title:
“Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.” Waters’ views on hedge funds are no secret. She thinks they are “predatory” and she calls their conduct “indefensible.” Her view goes something like this: “We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price.” If it turns out that there was no market manipulation, regulators may not have much to do. As a former SEC chairman explained to
WSJ, “You can sell garbage to the public as long as you say to the public, ‘This is garbage and you’d be an idiot to buy it, but would you like to buy it?’ Top financial regulators who met to discuss market volatility related to GameStop concluded that “the core infrastructure was resilient.” The Securities and Exchange Commission has promised to fix any wrongdoing. Scientists studying people’s ability to coordinate on online platforms are drawing parallels between the momentum in less fancied stocks sweeping Wall Street and the social media-fuelled frenzy that led up to the January 6 riot at the US Capitol. “There’s an important distinction between an actor who is coordinating manipulation, and a retail investor who gets caught up in the movement,” Sinal Aral, director of the Massachusetts Institute of Technology’s Initiative on the Digital Economy, told AP. In an interview to
Harvard Business Review, Aral makes important points about the ways in which algorithmic mediation gets tangled with everything else happening on a platform. Aral told HBR, “I think it’s important for people to realise that when it comes to markets, social media doesn’t operate in isolation. Of course, social media is a crowdsourcing mechanism where lots of people can coordinate their behaviour, or spread misinformation, or decide to buy and sell stocks, etc. But it’s coupled to very sophisticated systems that are analysing the sentiment on platforms and linking that sentiment to automated trading algorithms, as well as recommendations to institutional investors to buy or sell stocks. And so, there’s a feedback loop. Institutional investors have plugged their sensing systems into the crowd. This ends up complicating the story; it’s not two systems at odds with each other, it’s actually one big system getting tangled.”
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