Wall Street's big bets against GameStop went sour when Reddit traders bet on the company's success instead. Now, billions of dollars are on the line.
For a while, the little guy was on a roll. A bunch of Reddit users bought up shares of struggling video game retailer GameStop, taking on Wall Street investors who'd bet the company would fail. Wall Street bet against GameStop so much and for so long that at times it was one of the most heavily bet-against stocks on the market.
When people in the Reddit community r/WallStreetBets began pushing up GameStop's share price, establishment investors started losing billions and billions of dollars. Since then, GameStop's shares have been swinging wildly, going from about $17 at the start of the year to $483 last week and then to $90 by the close of Monday's trading. Shares rose slightly on Tuesday to close at $92.41, which is still down more than 80% from their highs last week.
What makes this roller coaster unusual is why the Reddit community is buying up GameStop shares. While some of them say they believe in GameStop's future, others are attracted to the idea that the higher GameStop's shares go, the more Wall Street's bad bets will cost institutional investors money .
"It's become political," said Derek Horstmeyer, a professor of finance at George Mason University. He'd been watching WallStreetBets forums for a year and a half and seen community members take "insane" positions in the market, throwing all their money into a position that sometimes wins big and sometimes loses even worse.
But the fight against Wall Street is different, he said. Many community members are angry at big investors' behavior over the past decade, be it when many were bailed out during the financial crisis, or watching them make even more money as people suffer during the coronavirus pandemic.
As GameStop's stock's withered, r/WallStreetBets traders have been posting that their fight against Wall Street isn't over and that, in fact, the stock will likely jump again on the backs of Wall Street's still bad bets. More people who profited from the GameStop price surge have also begun talking, including a hedge fund that said it made a $700 million profit riding the share price wave.
Regardless of how the battle over GameStop ends, investors and industry watchers say the online forums have shown they can be a force in the market. "I think now that they've recognized their power and now that they've learned some lessons, we're going to get more of it, not less of it," billionaire investor and Dallas Mavericks owner Mark Cuban told CNBC on Feb. 2.
He also gave a pep talk to the r/WallStreetBets forum that day, posting that the group had changed investing in big ways. "No disruption is easy or happens in a straight line," he said. "Stay with it. I am a believer."
The current low point for GameStop's stock is just the latest among twists and tales that have come to make up a crazy story. And aside from Cuban, other celebrities have gotten involved, including by Tesla CEO Elon Musk and CNBC financial commentator and former hedge fund manager Jim Cramer. There's even Michael Burry, one of the subjects of the book and movie The Big Short, who happens to be a prominent investor in GameStop.
Even Silicon Valley found a way to get in the middle of this mess. It's wild.
Despite the move being characterized as "insane" and a "Ponzi scheme," "market manipulation" and "mass psychosis," GameStop's stock has become the theater for a war between Wall Street and internet traders. Nearly all of them expecting it to fail The questions are when, and who will be on the losing end when it does.
"We're seeing a phenomenon that I have never seen," Cramer said during a segment as GameStock's stock began rocketing up. And GameStop could be just the start. "It's insane."
It's not just GameStop either. Reddit traders set their eyes on BlackBerry too, attempting to pull the same trick against Wall Street's negative bets. So far, they've pushed shares up more than double from $6.58 per share, where they started at the beginning of the year, though its price has swung up and down as well..
There's also AMC Theaters, which saw its business crater as movie releases were pushed back and people stayed at home. But Reddit users think Wall Street's being overly pessimistic about that one too, leading them to spawn the hashtag #SaveAMC on Twitter. Its stock jumped from $2.01 per share at the beginning of the year to $19.90 on Jan. 27, before halving the next day.
Some trading companies such as Robinhood, TD Ameritrade and WeBull responded to the fluctuations by restricting trades of GameStop, AMC and other fast-moving stocks during the chaos.
Robinhood drew particular ire, leading US Reps. Rashida Tlaib and Alexandria Ocasio-Cortez, as well as Sen. Ted Cruz, to criticize its decision. Some people had already raised concerns about Robinhood before, saying it "gamified" stock trading. Now it's being accused of outright market manipulation, including through at least one proposed class action lawsuit filed already. Robinhood, for its part, said market rules effectively forced it to put those restrictions in place.
It's a lot to take in. So, here's what you really need to know about GameStop, AMC and Wall Street.
Effectively, the r/WallStreetBets crowd realized Wall Street made a huge mistake. People known as short sellers who were betting GameStop stock would fall had been too aggressive.
The r/WallStreetBets crowd understood that if they could create artificial demand for GameStop shares with their own money, they could force Wall Street to recalibrate its bets, pushing prices even higher. And some investors who couldn't even back up their bets against GameStop, would have to pay even more.
As of Jan. 27, there were 3.8 million members of the r/WallStreetBets community, though it's nearly impossible to determine how many people are involved in the GameStop, AMC and BlackBerry schemes.
What we do know is that all this activity appears to have created a "short squeeze," where the short sellers betting against GameStop are being forced to buy more GameStop stock to cover their losses. That pushed the price up even more, which forces more short sellers to cover their losses, which pushes the price up even more. Some of the Reddit crowd believe that GameStop stock could reach into the thousands of dollars just because of this mechanism.
And that's why we're seeing GameStop's value swing up and down.
See also: GameStop's stock spike fueled by slang from Reddit's r/WallStreetBets community. Here's what it means
When people buy a stock normally, they're betting it'll rise or share enough profits that they'll make more money than they put in.
Short sellers, or "shorts," do the opposite. Shorts trade with borrowed shares and sell them, with hopes they can make money if the stock falls in the future.
Imagine Ian Corp. is a public company, and its shares are worth $10. A "short" would borrow shares of Ian Corp. and sell them for $10. Their bet is that Ian Corp. stock will actually drop below that -- maybe to $4. If it does, then, they can buy the shares at $4 and pocket the other $6.
If Ian Corp. stock jumps to $25, then the lender who made this bet possible may push the short to cover their bet. That would mean the short effectively has to buy the shares at the new, higher price.
When a short is right, betting against a company, they can make a lot of money. But if they're wrong, they can lose a lot more money too.
There are other options and tools to bet against a company's future as well.
The losses appear to be tremendous. As of Jan. 27, shorts seemed to have lost $5 billion betting against GameStop this year, according to Investopedia. About $1.6 billion, or about half, of those losses happened on Friday, Jan. 29, when the stock jumped 51%.
It's also worth noting that GameStop began the year as one of the most shorted companies on the market.
It is, but what's perhaps an even bigger indication of how dramatic these moves were, stock markets temporarily halted share trading for AMC, GameStop and other fast moving shares dozens of times since the drama began.
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The r/WallStreetBets crowd had been pushing up GameStop's stock for a while, believing Wall Street investor's bad bets would turn so sour that they'd cause a market rally.
By Monday, Jan. 25, that's exactly what happened. GameStop stock jumped more than 822%, from $17.25 per share at the beginning of the year to a high of $159.18 that day. The next day, it dropped by nearly half, only to rise back up. And then Elon Musk tweeted about it to his 43 million followers (using that weird internet vocabulary, of course), and the price jumped 40%.
Later that week, the stock jumped even higher, to $483 per share, before halving again. Amid all the chaos, the stock market temporarily halted GameStop share trading more than a dozen times some days because share price moves were wildly swinging by large amounts. On Feb. 1, the stock price fell more than 30% to $225, and on Feb. 2 it fell another 60% to close at $90.
Part of what's driven this behavior is the popularity of retail investing, or when traders who aren't Wall Street professionals buy and sell stocks. Stock trading apps, often with no fees, have made it easy for people to jump into the market. And social media has helped people to rally together, egging one another on to buy more and more of a stock.
"GameStop's rally is one in a series of eye-catching market moves to stir concerns among fund managers, some of whom say trading by individual investors is pushing stock prices out of whack with fundamentals," The Wall Street Journal wrote when the drama began.
That said, it's hard to pin all dramatic market swings on the r/WallStreetBets traders. For example, the value of silver jumped to eight-year highs on Monday, Feb. 1, but people in the Reddit community say they aren't the ones doing it.
There's also growing signs that the r/WallStreetBets crowd weren't the only people making money off these share moves. Senvest Management, for example, told the Wall Street Journal that it profited $700 million off shares it bought in September, when they were about $10.
"When it started its march, we thought, something's percolating here," Richard Mashaal, who helps run the fund, told the WSJ in a story published Wednesday. "But we had no idea how crazy this thing was going to get."
Big name trading apps like Robinhood, ETrade and others have reportedly struggled to remain online amid all the hysteria. TD Ameritrade on Jan. 27 acted to restrict the sudden spikes in demand, "out of an abundance of caution amid unprecedented market conditions."
Robinhood has also come under particular scrutiny for appearing to severely restrict trades of some stocks while the market was wildly fluctuating that week. Politicians on both sides of the aisle in the US have called for an investigation into the app maker. Meanwhile, many angry Redditors say they'll stop using Robinhood. Some have even threatened to join a class action lawsuit.
Nasdaq said it will halt trading on a stock if it finds a link to unusual activity on social media. The company said it sees its role as a "self-regulatory organization" is to make sure its markets act in a "legitimate" way. "Regulators kind of have to catch up with the technology that's now available," Nasdaq CEO Adena Friedman told CNBC on Jan. 27.
Throughout the past week, the markets have temporarily halted trades of GameStop and AMC stocks in particular because of the wide price swings and heavy volume.
Last week, the White House and the Securities and Exchange Commission both indicated that the administration was reviewing what was happening. On Wednesday, Feb. 3, Reuters and The Washington Post reported that Treasury Secretary Janet Yellen and other top financial regulators would meet amid increasing calls for financial oversight.
"Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets," Treasury spokeswoman Alexandra LaManna said in a statement to the Post.
The department didn't immediately respond to a request for additional comment.
Of the stock trading apps, Robinhood appeared to be the most aggressive in shutting down purchases of highly volatile stocks like GameStop and AMC. The company hasn't given clear reasons, other than vaguely saying it's working in the interest of users. But the US government may not agree.
On Jan. 29, the Securities and Exchange Commission said it's "closely monitoring and evaluating the extreme price volatility of certain stocks' trading prices over the past several days."
The statement didn't mention Robinhood by name, but the commission said it would "closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."
Robinhood declined to comment about the SEC statement. The White House referred questions about GameStop and brokerage firms to the Treasury Department, which houses the SEC.
On Jan. 29, the company published a blog post explaining that the company it works with to help users trade stocks was what had set off all the drama. That company, a clearinghouse that helps facilitate the transaction of stocks and cash between buyers and sellers, requires Robinhood and other trading companies it works with to have a specific amount of money in deposits each day to cover their customer's stock trades. That amount changes each day, based in part on market volatility.
Robinhood said the increased share trading led its clearinghouse to demand Robinhood increase its deposits tenfold. "That's what led us to put temporary buying restrictions in place on a small number of securities that the clearinghouses had raised their deposit requirements on," the company said. The requirements were so large, it said, that it had to restrict trades in order to meet its requirements.
"It was not because we wanted to stop people from buying these stocks," the company added. "This is a dynamic, volatile market, and we have and may continue to take action to make sure we meet our requirements as a broker so we can continue to serve our customers for the long term."
It has. A little over a month ago, on Dec. 17, the SEC charged Robinhood with "repeated misstatements that failed to disclose the firm's receipt of payments from trading firms for routing customer order to them." What that means in plain English is that Robinhood didn't tell users that their share trades might be accessible by people competing against them in the market.
Robinhood made its name by offering stock trades without a standard commission that people often payed at other firms. The SEC said that between 2015 and 2018, Robinhood made misleading statements and omissions, including "in FAQ pages on its website, about its largest revenue source when describing how it made money – namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as 'payment for order flow.'"
The SEC estimated that Robinhood's approach deprived users of $34.1 million, even after taking into account the savings from not paying a commission.
Robinhood agreed to pay $65 million to settle the charges "without admitting or denying" the SEC's findings.
"There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money," Erin E. Schneider, director of the SEC's San Francisco regional office, said at the time. "But innovation does not negate responsibility under the federal securities laws."
GameStop didn't respond to a request for comment. BlackBerry executives told MarketWatch it was "not aware" of any reason for the recent trading activity. BlackBerry did reach a settlement with Facebook earlier this month over a patent fight, though the terms were not disclosed.
There's the seeming easy money aspect, which is compelling in and of itself if you're that comfortable with risk. But some of them are also framing this as a crusade against Wall Street. "We're in a war," one Redditor posted. "A war for the redistribution of wealth."
Aside from being a prolific Twitter user, Musk has also recently learned he can drive people to various companies' stocks. He tweeted about how much he enjoyed buying something for his dog off Etsy, and the stock jumped. Now he's tweeted about GameStop, stirring up more frenzy.
If you're a fan of Comedy Central's The Daily Show, Jon Stewart posted his first ever tweet in support of the Reddit crowd on Jan. 28. Among other things, he also said we clearly hadn't learned from the financial crisis.
That's Keith Gill, or Roaring Kitty on YouTube, one of the first people to kick off this rally. He spoke to The Wall Street Journal, telling his story about how he never expected this to happen.
He posts a screenshot of his share values from his ETrade brokerage every trading day, in what he calls a YOLO ("You only live once") update. Many r/WallStreetBets members cite his holding onto shares despite stock fluctuations as inspiration for them to hold as well. "REMEMBER: If [he] can hold even through a 130% dip, so can YOU," one Reddit user posted as the stock started to fluctuate.
"I thought this trade would be successful," Gill told the Wall Street Journal in the story published Jan. 29, "but I never expected what happened over the past week."
It is. Saturday Night Live, of course, got a good laugh over the whole thing when the comedy show lampooned the Reddit investors.
"This is crazy, dude," said SNL's stand-in for the Reddit investors. "I put all my money in GameStop and I can't lose."
Aside from the good laughs, just watching this drama is enough to make your head spin. For example, on Jan. 27, the popular chat app Discord temporarily banned the r/WallStreetBets community from its service for violating its rules against hate speech and glorification of violence. Apparently, some of the nastier elements of the community had repeatedly broken Discord's rules. Discord said the group needed to do a better job keeping control of that behavior.
The group in charge of the r/WallStreetBets Reddit board made it private during one evening, locking out anyone else who might be interested in joining.
That appeared to spook investors, who suddenly sent GameStop and AMC stock diving that same time. Soon, the group was publicly available again. And it reversed the ban and promised to work with the community instead.
A little over an hour later, the Reddit community was publicly available again, denizens had created a new Discord chat group, and GameStop and AMC stocks were recovering from their sudden slumps. If you'd put down your phone to watch a movie before it happened, you might never have noticed by the time it was done.
Except you may have seen Elon Musk tweeted about how Discord wasn't cool anymore (Discord eventually reversed its decision.)
Michael Burry is an interesting subject himself. He became famous for betting against the housing market before the great recession kicked in around 2007 and 2008. He'd invested in GameStop but also said he believed all this behavior was "unnatural, insane and dangerous."
Of course, some of the Reddit members say they see this battle over GameStop as their Michael Burry moment, making it all that much more interesting.
It's always smart to consult a financial professional before making investing decisions.
Correction Jan. 25 at 5:52 p.m. PT: Fixed the explanation of short selling to make clear how the process works and that there are different ways to bet against a company's stock price rising.