The GameStop Saga Explained: How Reddit Investors Tripped Up Wall Street

What is the deal with GameStop?

There’s a good chance you’ve heard that question many times in the past few days.

With more than 5,000 stores, GameStop is a video game chain where customers can buy, sell and trade their games, consoles and gaming accessories. It’s a mall staple, but shopping centers have been struggling for years, and the coronavirus pandemic has been devastating for retailers.

But then a most unexpected and weird thing happened. GameStop’s stock has soared to unbelievable heights lately. Topping $400 per share earlier Thursday, it was up more than 2,000% so far in this young year, including a 134% jump on Wednesday alone.

But it continues to be a bumpy ride for investors. By late Thursday morning, GameStop shares had fallen 63% to $126 after some brokers imposed trading limits on the stock. The stock later recovered but closed at $193.60 — a 44% loss.

Most of GameStop stock gyrations have to do with a tug of war between amateur day traders on Reddit, one of the world’s largest online communities — who are betting on the stock to keep rising — and the professional managers of Wall Street hedge funds, who have bet that GameStop’s stock will crater.

It’s easy to see the downside for GameStop, a company that has closed 783 stores in two years and faces stiff headwinds. More and more game and console sales are happening online and through its competitors — Walmart, Target, Best Buy and Amazon.

So how has GameStop suddenly become the darling investment of online traders from Reddit’s wallstreetbets forum?

As Wired reported:

” ‘It was a meme stock that really blew up,’ said WallStreetBets moderator Bawse1. ‘The massive short contributed more toward the meme stock.’ GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock.”

On Wednesday, a hedge fund called Melvin Capital closed out its short position in GameStop after taking a big loss, CNBC reported. Short sellers profit when a stock goes down.

Another short seller, Andrew Left of Citron Research, said in a video on Wednesday that he had covered most of his short position in GameStop at a loss. Last week, Left had predicted the stock would drop to $20 a share, from $40 at the time.

“I had no idea what that would set off,” Left said. “This has captured the attention of … America and every trader and non-trader alike.”

Melvin Capital and Citron were caught in what’s known as a short squeeze, forcing the funds to buy more GameStop stock to cover their losses, which ended up driving the stock price even higher. This has happened before, most famously with Tesla stock.

The GameStop rally came after investors saw glimmers of hope for the company this month when the chain changed the makeup of its board of directors.

On Jan. 11, GameStop announced that its sales overall fell 3.1% during the holidays, due in part to the “significant impacts” of the pandemic, but its e-commerce sales soared more than 300%. It said those online sales represented about a third of the company’s total sales.

The company also said it had entered an agreement with RC Ventures, one of its largest stockholders, to add three members to GameStop’s board of directors. The new members include Ryan Cohen, a founder of Chewy, an online pet products company worth $42 billion.

Then on Jan. 13, two days after the announcement about Cohen joining the board, GameStop stock jumped 57% — from $19.95 per share to $31.40. The stock got its big kick when Reddit’s r/wallstreetbets community — now with more than 4 million members — fawned over a Nov. 16 letter from Cohen to the GameStop board he would later join.

GameStop continued to soar as the Reddit investors stayed bullish on their favorite stock. By Jan. 22, it closed at $65. On Monday, it finished at nearly $77. On Tuesday, it nearly doubled to close at around $148. And Wednesday, it more than doubled, ending at $347.51.

For those Reddit members, it’s not just about making money.

“There’s also kind of a populist thing happening here with a lot of these traders, judging by the Reddit threads. You know, they just want to poke a middle finger at Wall Street,” says Paddy Hirsch of NPR’s The Indicator From Planet Money podcast.

GameStop’s stock symbol is GME. On Reddit, one member of wallstreetbets, wrote early Thursday: “GME is about sending a message. … For all the recessions they caused. For all the jobs and homes people have lost. For all the people that can’t pay for college because minimum wage has stagnated while wall street gets rich. For all the retail traders they left holding the bag. For all the times they got bailed out with our tax money while we got nothing.”

Another member suggested that the Reddit traders were part of a resistance movement of sorts, writing, “[T]his is not a war on billionaires, the wealthy yada yada, but it may well be described as a resistance against injustice, inequality, rigged rules, uneven playing field etc which has been rampant on Wall Street forever.”

A wallstreetbets member, who vowed not to sell GameStop, wrote late Wednesday: “I am proud to be a part of this piece of history with you. … Call it an opportunity, call it revenge, or justice, I know we are on the right side of this.”

Rep. Alexandria Ocasio-Cortez, D-N.Y., a member of the House Financial Services Committee, weighed in on the GameStop phenomenon. “Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” the lawmaker tweeted Thursday.

And it hasn’t stopped with GameStop. Other companies that are suffering heavily during the pandemic are seeing their shares soar as people on Reddit’s wallstreetbets talk them up. The companies include AMC Entertainment, the beleaguered theater chain, which shot up more than 300% on Wednesday (before dropping 56% Thursday), and American Airlines, which soared more than 30% Thursday morning (it closed up 9%).

Robinhood, a popular trading platform for young traders based in Menlo Park, announced Thursday that “in light of recent volatility” it was restricting transactions for certain securities, including GameStop and AMC, and raising margin requirements. It later said it planned to allow “limited buys” of these securities, starting Friday.

Robinhood’s stated goal is to “democratize” investing and to bring more regular people into investing. The company has forced huge, ground-shaking changes for the brokerage industry, such as its decision to charge zero commissions for customers trading stocks and exchange-traded funds. That’s why some users took Thursday’s actions as an affront.

At least one lawsuit was filed Thursday in U.S. District Court in New York claiming Robinhood manipulated the market by restricting investors’ access to trading GameStop.

Robinhood investor Carlos Amaya said the app’s action Thursday was a disappointment to users like him who prided themselves on being a “different breed of investors.”

The 28-year-old school operations manager in Washington, D.C., said his parents immigrated from El Salvador and he was the first person in his family to buy stocks when he started using the app in 2017. He’s since made several thousand dollars.

“We pride ourselves in the name Robinhood because we’re trying to make more money and be the next people at the top,” he said. “You would expect Robinhood to let us do our thing instead of blocking us and saying it’s for our protection.”

South Bay Democratic Rep. Ro Khanna said the GameStop episode “has demonstrated the power of technology to democratize access to American financial institutions, ultimately giving far more people a say in our economic structures.”

In a statement Thursday, Khanna called for “more regulation and equality in the markets,” and accused Wall Street of spending billions to “crush” GameStop and “put workers out of business” instead of investing in future technology.

The mania has gone global, “whipsawing stocks from Amsterdam to Sydney,” Bloomberg reported. “In Europe, short-seller favorites including Unibail-Rodamco-Westfield jumped 20% or more. E-commerce giant Rakuten Inc. and baby-care goods maker Pigeon Corp. climbed at least 6.9% in Tokyo on Thursday.”

With the stock market near all-time highs, there had already been worries that a bubble was coming. “The danger, as the dot-com bubble showed, is that Mr. Market can rationalize just about anything and build it into a narrative,” The Wall Street Journal‘s Jon Sindreu wrote.

The frenzy over GameStop has gotten the attention of other lawmakers and regulators.

Sen. Sherrod Brown, D-Ohio, the incoming chairman of the Senate Banking Committee, said Thursday that he planned to call a hearing on the “current state of the stock market.”

Sen. Elizabeth Warren, D-Mass., on Wednesday called on market regulators to clamp down.

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” she said in a statement. “It’s long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do.”

Massachusetts Secretary of the Commonwealth William Galvin, the state’s top securities regulator, also sounded a warning about the situation.

“The marketplace should be a place where risk is taken, but not reckless risk and not a situation that undermines the system, and that’s what we’re looking at here,” Galvin said on CNBC.

Then, late Wednesday, the Securities and Exchange Commission said in a statement that it was “aware of and actively monitoring the on-going market volatility” and that the agency was working with other regulators to “assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”

This story includes reporting by The Associated Press’s Alex Veiga.

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