A lot has been said in the past week about the guerrilla collectivist organising against Wall Street by Reddit users on r/WallStreetBets through the mass purchasing of GameStop stock and its consequences for institutional finance. However, to understand the significance and the scope of this seemingly watershed stand against the systems of banking and finance, we must put it into its much-needed context, ask of this black swan event – how, why, and so?
To understand why GameStop became the Normandy-esque assault by legions of amateur investors in order to disrupt the established order within institutional finance, we must look to a treatise written by Reddit user ‘u/Player896’ four months ago. The anonymous Redditor had penned a detailed post titled ‘Bankrupting Institutional Investors for Dummies ft. GameStop’ in which the poster lambasts the short-selling of GameStop stock by predatory hedge funds and outlines how the 120% short interest is a misaligned way for Wall Street to undersell a company which was making strides towards moving with market trends and transitioning from being a physical retailer to e-commerce brand. However, despite these changes, prospects were bleak for the retailer which had closed 460 stores by December 2020, resulting in tangible job losses. With the announcement that Chewy co-founder, Ryan Cohen, had been appointed to GameStop’s executive board – GameStop’s share price increased by an eye-watering 583% from last year. GameStop’s move towards digital was spearheaded by Cohen and it’s inflated stock price was owed more to creditors and investors betting on GameStop’s future success than underlying sound business fundamentals.
I would not be the first to highlight the sometimes inverse correlation between the retail success of businesses and their failure as publicly traded companies – for instance, it may surprise you to know that despite monopolising online video streaming, YouTube has never made a profit, and usually just “breaks even” (CBS). The same can be said then for GameStop – as a commercially failing business, wrought with store closures and job losses, its stock price rose with creditors investing in its far-flung future potential rather than relying on the firm fundamentals of the business. In this context, short-selling (borrowing the stock and selling it high with the intention of later buying it back lower) GME stock does not seem unreasonable, it even seems like a sure-fire way to make an easy profit; certainly, Melvin Capital thought so. By ‘shorting’ the stock, they were essentially betting on the company to fail owing to its overinflated value. r/WallStreetBets took note of how heavily the stock was being shorted by institutional investors and thus came the avalanche of amateur investors buying up GME stock en masse – forcing short-sellers to abandon their positions to temper heavy losses. Shares of GME stock shot up from $18 at the beginning of the year to an eye-watering $287 by the 27th of January. Melvin Capital lost 30% of its value and was forced to get a $3 billion bail out by their partners. On the face of it, this seems to be the culmination of almost a decade of discontent felt by ordinary people – many of whom had their savings diminished in the 2008 financial crisis – but exactly why Reddit deciding to beat Wall Street at its own game has as much to do with the rigged system as a whole as it does with the singular practice of short-selling or the predatory behaviour of hedge funds such as Melvin Capital.
And hence we arrive at the ‘so?’ of the cataclysmic event. Now that the initial adrenaline rush has dissipated and cries of financial revolution have died down – we must evaluate what the Redditors achieved and why the GameStop phenomenon will not bring about the change that many so hoped it would. Firstly, it has been made clear by institutional finance that such coordinated stands against Wall Street will not be tolerated. In response to the mass buying of GME stock, NASDAQ CEO Adena Friedman threatened to halt all trading believed to be caused by social media activism. As well as this, various online trading platforms such as Trading212 and Robinhood curbed all buying of shares of GME as well as AMC (another r/WallStreetBets targeted stock). The great irony of this being that after the 2008 financial crisis, to placate the ‘Occupy Wall Street’ movement, institutional traders promised a ‘democratisation’ of the stock market and rather ironically, this was the very ethos of trading platforms such as ‘Robinhood’ whose aim is stated bold and bright on their website and put simply; “We’re on a mission to democratize finance for all”. After the events of this month, however, the naivete surrounding the myth that any ordinary person can make their fortune in the stock market has worn off, r/WallStreetBets has drawn the curtain to reveal a system which is still fundamentally hostile to ordinary people and their capital. Thus, whilst GameStop was a stab at the heart of institutional finance, Wall Street remains as reticent to change as ever.