If two weeks ago you had never heard of GameStop, or Wall Street Bets, you could be forgiven. But not last week, when the saga of the US video game retailer and how an informal army of so-called retail investors brought famed hedge funds to their knees with some $23bn in losses.
Wall Street Bets is a so-called subreddit on Reddit, the website that likes to call itself “the front page of the internet“. Reddit has long been the source of memes and other viral internet phenomena, but has never really been known outside of a very tech-focussed audience.
But as this subreddit has demonstrated, Reddit has grown not only in size and popularity but its ability to change global finance. And this band of amateur investors on Wall Street Bets, as we’ve seen with these unprecedented losses for short sellers who have until now behaved with impunity. Cheered on by Elon Musk amongst others, r/WallStreetBets Is now not only a new cultural phenomenon, but a meme in its own right.
It began with a former marketing executive called Keith Gill, who decided to take a bet on GameStop, thinking it was undervalued. At the beginning of the year its share was trading at $18.
But the big hedge funds thought it was overvalued and bet that it would lose even more value. Using a complicated system of lending shares and selling them, then trying to make money off the difference, short sellers are considered a menace by many big companies, who see the listings swing wild when these share-price manipulators take interest in them.
The r/WallStreetBets forum, with 4.5m users of so-called retail investors, has helped fuel a 2,200% run for GameSpot, with its share surging 135% to reach $347.51 two weeks ago. A day later it was trading at $194, but it is still up 1600% this year.
When these subredditors realised that these hedge funds were exerting a “short squeeze” on GameStop – which trades as GME– they decided to stick it to “the man”.
What followed was a demonstration of the power of the crowd, or the power of Reddit users, or basically just the little guy sticking the finger to the big guy. And the little guy won. Spectacularly.
One Reddit post, with tens of thousands of upvotes, was addressed to Melvin Capital, arguably the most prominent of the GameStop short-selling hedge funds: “You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. I dumped my savings into GME [GameStop’s trading symbol], paid my rent for this month with my credit card, and dumped my rent money into more GME. This is personal for me, and millions of others. I’m making this as painful as I can for you.”
Melvin Capital lost 57% of its value and required a $2.7bn cash infusion from its own investors, and one of many hedge funds forced to sell lucrative Apple shares to cover losses.
“I didn’t expect this,” Gill told The Wall Street Journal. “This story is so much bigger than me. I support these retail investors, their ability to make a statement.”
And what a statement it has been.
This article first appeared in the Financial Mail.