On a typical day in early January, the stock for GameStop, or GME—a beleaguered brick-and-mortar video game retailer undergoing downsizing—traded at around $18, with about 6.5 million shares changing hands. With the pandemic devastating retail and much video game purchasing having shifted to digital channels, GameStop’s prospects were poor. It became one of the most shorted stocks on Wall Street—that is, hedge funds and other large investors bet billions that GameStop’s stock price would go down.
Then Reddit stepped in. Led by users of a forum called r/WallStreetBets, Redditors are using memes, trolling, and their own money to drive up the price of GameStop dramatically. On Wednesday morning, GME opened at $354.83—an increase of almost $200 over its previous close. In the last few days, hundreds of millions of shares have changed hands, snapped up by both Reddit day traders and big hedge funds who have been forced to buy more shares to cover their short positions. On Tuesday, it was the most traded stock in America.
While pundits search for explanations, large investors are scrambling to stem their losses. Being on the wrong side of a short position can lead to a vicious cycle in which one has to keep buying a rising stock at higher and higher prices. Melvin Capital, one of the hedge funds with the biggest bets against GME, received a bailout of nearly $3 billion from Point72, a fund owned by Steve Cohen, who also owns the New York Mets. Melvin later managed to extricate itself and close out its position but not without suffering what may have been several billions of dollars in losses.
The mood on Wall Street and in financial media has been a mix of helplessness, confusion, and apoplexy, as traders struggle with how to respond to this chaotic army of speculators. Speaking on CNBC Wednesday morning, Andrew Ross Sorkin seemed dumbfounded at what was unfolding. Redditors and other GME boosters “might be able to argue now that they succeeded,” said Sorkin. “If this was really about vanquishing Wall Street, vanquishing hedge fund managers, in this case, they did take a loss. It might not put them out of business, but, boy, did they come close.”
He added that he thought the stock was really worth $20 to $30. He failed to consider that one of the main lessons of this increasingly bizarre episode is to ask what something is “worth” when a bunch of online trolls can push a stock’s price into the stratosphere. Sorkin may not like the answer.
Having transformed GameStop overnight from a declining retailer to a volatile giant with a market capitalization of nearly $10 billion, Redditors are now moving onto other stocks: AMC theaters (up more than 200 percent in Wednesday’s trading), the drinks company National Beverage, BlackBerry, even a liquidation company that controls the last assets of Blockbuster Video. As the journalist Matt Zeitlin said, these are fitting choices for a band of Redditors—equal parts nostalgia, leisure, and a certain kind of suburban basement ethos.
Expressing camaraderie in their united anger at Wall Street, these Redditors have been mistaken, by some pundits, for Occupy Wall Street types looking to undermine capitalism. But by and large, these insurgent day traders don’t want to destroy financial capitalism; they want to disrupt and profit from it. Or as one particularly excited Redditor wrote, “WE ARE AT WAR YOU MOTHER FUCKERS GIVE THEM NOTHING BUT TAKE EVERYTHING!!!!!!”
It makes for fun conversation, but trying to parse some latent revolutionary intent is almost beside the point when the farcical nature of the whole affair is so clear. If the GME fiasco is heightening any contradictions, it’s calling attention to the blatant absurdities of casino capitalism. How is the Redditors’ collaboration much different from hedge funds and institutional investors deciding to short GameStop almost as a collective? Why is market manipulation and activist investment acceptable when a billionaire does it but not when an anarchic group of quarantined day traders does? Why is it OK to bet on a company’s failure? Pull at these threads long enough, and you might unravel the ideological underpinnings of the financial industry. It’s not just money Wall Street fears losing in this imbroglio; it’s its legitimacy, too.
Many of these small-budget day traders use Robinhood, a popular trading platform that has lately been trending on Twitter alongside GME. Robinhood has been noted for its gamified elements—there are aspects of social media, and a user can match the trades of the platform’s influencers—making its resemblance to a casino almost too on-the-nose. Drawing millions of young professionals, day traders, and novices to its platform, Robinhood has become a target of regulators who have accused it of misleading practices. In December 2020, Robinhood agreed to a $65 million settlement with the Securities and Exchange Commission for, among other things, not offering the best prices on shares to its users. It was also accused of contributing to the suicide of a 20-year-old student, after the app showed that he held a negative balance of $730,000.
Robinhood’s CEO speaks of democratizing finance, equating it to homeownership as something that every American should aspire toward. George W. Bush made a similar call for a society of homeowners, just as banks began trading in complex financial derivatives and pressing mortgages upon people who couldn’t afford them. The resulting bust nearly took down the global economy. As for the goal of universal stock ownership, we have a ways to go—55 percent of Americans own some form of stock, according to Gallup, a number that’s declined in recent decades. Large investors like the hedge funds so hated by r/WallStreetBets still dominate the finance industry and—at least before this week—are the ones who have the capacity to move markets. For most of us, then, the GME phenomenon is bizarre and fascinating but probably removed from one’s material concerns. As the pandemic has demonstrated, the health of the stock market in no way reflects the health of a wider economy afflicted with record hunger and poverty.
Industry veterans complain that there are no fundamentals attached to this GME boom—no basis in company revenue or in some strategic plan to turn around the retailer. One could say as much about the many baroque financial instruments that underwrite Wall Street’s riches while contributing little to the common good. The financialization of the U.S. economy over the last 40 years has been a disaster for most Americans—bringing income inequality, recessions, a housing crisis, and the impression, probably justified, that the economy simply doesn’t work for them. It is indeed a giant casino, and like any casino, it’s rigged to the benefit of the operators and their partners. No wonder watching hedge funds scramble to cover their positions brings out a perverse pleasure in small-time day traders and socialists alike.
Ultimately, someone will have to pay for all of this volatility. Whether “meme stocks” herald a new era in investment—and in the relationship of individuals to corporate finance—is unclear. It’s up to regulators and Wall Street to decide how to respond to this wave of market-moving trollery. For those of us not racing to sign up for a Robinhood account, we are nothing more than idle spectators standing around the craps table, cheering or just looking on in horror as someone else risks it all.