GameStop is at the centre of a Wall Street phenomenon, as a group of amateur investors on Reddit is manipulating its stock and taking on hedge funds.
The American game retailer has been struggling to stay relevant over the past few years as digital software sales cut into their business model, threatening store closures. However, a recent surge in interest driven by the subreddit r/WallStreetBets has driven their stock up over 1600% this month, with shares doubling yesterday to close at $346.37. Over the last six months, its value increased 8000%.
GameStop has long been the target of short sellers, who essentially bet that a company will fail and profit from its collapse. Instead of buying low and selling high, they “borrow and sell a stock when it’s high and bet that it will continue to fall,” aiming to pocket a profit if the stock falls lower.
This practice was targeted by users of r/WallStreetBets (WSB) recently, and escalated this month, when the stock increased 10% due to a shuffling of its board members. The positive trend became a wave last Friday, when the volume of traded shares spiked and put pressure on short sellers—creating a “short squeeze”, meaning investors had insufficent shares remaining to cover their positions and trapping them with lots of high-priced stocks. WSB users were at the heart of this activity, which is believed to have cost short sellers $23.6 billion this month.
Reddit co-founder Alexis Ohanian Sr. described the situation as “the public doing what they feel has been done to them by institutions [and] an echo of what we’ve seen social media enable the public to challenge institutions for the last decade.”
The Biden administration has begun to monitor the situation, but prominent Democrats like Elizabeth Warren and Alexandra Ocasio-Cortez have tweeted support for the challenge to Wall Street, alongside executives like Elon Musk and Mark Cuban. “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,” AOC tweeted.
The situation has begun to turn this morning as Robinhood, the stock app of choice for WSB users, restricted transactions for GameStop’s stocks “in light of recent volatility,” as well as other companies favoured by the subreddit, like AMC, BlackBerry, and Bed, Bath, & Beyond. GameStop’s value peaked at $469 at 10AM, and crashed to $126 at 11:20AM as a result. At press time, its value had rebounded to $263.48.
There is no sign that the users are doing anything illegal at this time, but Reddit’s management has vowed to cooperate with law enforcement if required.