I’ve been tracking the “GameStop Saga” for a while now. I think it’s fascinating, both what’s going on in the actual financial markets, and people’s reaction to it. And when I say people, I do mean literally everyone with an opinion on it. To recap for those who aren’t 100% in the know: GameStop is an American game seller. They are also a company which was expected to be on the brink of bankruptcy, or shall we just say, financial difficulty? Their share price at the start of this year was about 18 dollars, and their share price has never really gone above 35 dollars. Prior to the Reddit Renegades, that is. As soon as it became “public” knowledge to some of Reddit’s finest (the investor subreddit) that big hedge funds, such as Melvin Capital had “shorted” GameStop stocks, they went into a frenzy. A very organized frenzy, that is. There was a massive call to suddenly buy GameStop stocks to drive the price up. It worked. The share price at the best of times reached 483 dollars. Talk about a game changer… Now for those who don’t do corporate finance or hedge fund management as a hobby, to short a stock is to bet against it. It’s “borrowing” the stock from someone who already owns it, selling it for the current price, waiting for the share price to drop some more (you are betting against the stock, after all) buying back the stock at this lower price, and then giving the stock back to its legitimate owner, the one you borrowed it from. Your “pay” is the difference between the initial price for which you sold it and the price you bought it back for. For Melvin Capital the idea was to borrow loads at the share price at the start of the year, which was around 18 dollars, wait for the stock to drop to much lower, buy it back and reinstate it to its borrower, making millions of profit in the process. But if the share price is being driven up, the opposite happens, where the “shorter” in this case Melvin Capital, will lose money trying to get the stock back, at a now higher price. The smart move here is to get the stock back asap, before its price gets even higher, as a result driving up the demand for the stock and increasing its price even further. This is also referred to as a “short squeeze.” The guardian has a nice article explaining this as well. Now you might be wondering: why GameStop? And what is Reddit trying to do here? And those are very good questions.
Why GameStop? It took me a while to find a direct reason for why this company was picked specifically. Articles do indicate that GameStop was a company that had, and continued to be, losing out on profits as a lot of video game selling has moved online. It is likely that this company, which was largely brick and mortar based, wouldn’t last through the e-era, and it’s plummeting share price was indicative of this outcome being quite likely. However, with some further digging, I find that this is not necessarily true. GameStop was actually preparing for a comeback. It was transforming itself into a company that would be able to survive, maybe even thrive, by "appointing three new directors with significant e-commerce and technology experience" to aid GameStop in its new goal of "pursuit of growth and market leadership." GameStop wanted to continue fighting and was actually buying back its own shares in an attempt to make this work. Melvin Capital wanted to it see it fail just for the sake of making profit, as they had shorted the stock. This is what got Redditors' backs up. Second question: what is Reddit trying to do? I’ve read several analyses on this topic already. The ones I’m most disappointed in are those out of the purely financial sphere. This is not about making money, although I’m sure some of the first movers have been able to gain serious financial advantages from this very basic “buy low sell high” strategy. But as I said before, this is not (really) about money. To understand why Reddit is doing what it’s doing, you need to understand who and what Reddit is, first. Reddit is an online platform for sharing anything, and I do mean ANYTHING that’s worthwhile (to someone) on the internet. There are subreddits dedicated to things so niche you wouldn’t have come up with it yourself. The subreddit for investing is r/wallstreetbets, which has millions of members. And these are exactly the people we will be focusing on, not the whole of Reddit. Now for Reddit in general: lots of viral news, jokes and stories have originated from here. On top of this: Reddit is young. Without massive generalization, picture how the young feel about the current financial system, hedge funds included. I can tell you that most of them are disillusioned and rejecting at best, and vengeful at worst. You don’t associate the young with the untransparent, ethically dubious and often corrupt system either. No it’s old white dudes in suits. And they hold a lot of power. They can destroy companies left and right, and the “shorting” on stocks which hedge funds are famous for (some more than others), does aid in the destruction of a company. This tactic of shorting is often also helped that at the time the stock had been shorted, a report regarding the company would come out, which was critical or just down right destructive, as a result further decreasing the demand for the stock, and as such plummeting its share price. It doesn’t take a genius to figure out that these tactics are in the grey area of being legal (they are though). And from a moral standpoint: disgusting. The reactions that happened are indicative of the power that these old people with money hold, I quote Kenan Malik writing for the Guardian here directly, because he put it damn well: “The titans of Wall Street did what all entitled people do. They whined. How dare people manipulate the market! Only those with Manhattan penthouses who attend dinner parties with presidents and Federal Reserve governors should be able do that, not people with online handles such as DeepFuckingValue… Having the right connections means that when you whine, others listen. Regulators in Washington are now keeping an eye on possible market manipulation by social media groups. The digital investment app Robinhood, which has helped open up the stock market to a wider public, last week restricted trades in GameStop, allowing investors to sell but not to buy, a sure way of pushing share prices down… Discord, an online platform, banned wallstreetbets from its servers for spreading “hate speech, glorifying violence and spreading misinformation”… It’s quite a coincidence, though, that the group should be taken down for “hate speech” on the day that big investors lost so much money.” Well put Kenan.
So what’s next? Numbers indicate that Melvin Capital has lost a massive amount of money, and needed an emergency package to just keep going. If the motive of r/wallstreetbets was to hurt hedge funds, or at least one hedge fund, they managed. However, looking purely at numbers, the stock price of GameStop has already started plummeting again. This is not surprising, as Robinhood and Discord are jamming nails into its coffin, but it was also to be expected without those weaklings aiding the cause. A stock is supposed to be (I say supposed to be, because there are a lot of inflated stock prices. Tesla anyone?) reflective of the underlying value of the business. GameStop is still a company in the midst of a potentially life-saving transformation, so for its stock price to be 483 dollars makes no sense. Although I appreciate the hype, it was only a matter of time before the market corrected this mistake (although it’s been taking a damn while with Tesla…). The Motley fool is warning people against this, as a way of “getting out whilst you can” with some profit. But to me it now just reads as one of the writers having been bought by Melvin Capital to encourage stock sales, as a way to drop demand and share price even further. But that might just be my aluminium hat talking. Who knows?
Now let’s apply some behavioural science to this, because that’s what we do here. From a behavioural science perspective, none of this behaviour is irrational, although I do warn against buying stocks during a hype if “you’re in it for the money.” But quite frankly, I don’t think the majority of people, definitely not the first movers, were in it for the money. I think this is a big middle finger to Wallstreet and the current financial system upholding the 1%, and not giving a damn about anyone or anything else. What we’ve seen here also goes far beyond being “meme worthy,” although I’m sure the memes will be beautiful. What we’ve seen here is that there is lots of anger against the wealth and power division in society, and although we can claim that, thanks to the internet, there is a larger platform for democratization, this is not happening. The rich old suits whined to the right people, and “sanctions” followed, as seen with Robinhood’s restrictions and Discords banning of the subreddit due to “hate speech.” (I would like to mention that there have been cases of blatant hate speech on parts of Discord, but it’s all just a bit too perfectly timed for my liking). These platforms, and I do have to emphasize this, are platforms used by the younger generations, and not the old rich suits! The platform turned against it younger users, showing just how much it cares about them, and about the systems holding it in place. Young people: 0 – archaic systems: 1. To add further insult to injury, especially when reading the "financial news" approach to commenting on this event, have you noticed how the Redittors have been referred to? "A bunch of nerds", "attic traders", "bored loners", "trolls"... Bit dismissive much of a group of engaged and intelligent people who just cost a hedge fund billions of dollars? No? Just me? Also, the reason I haven't been able to find a direct motive for the GameStop Saga is because "serious news outlets" don't really seem to aim to find one. They list "anger, boredom or having a laugh," as some of the likely culprits. Is this what journalism is these days? Who's bloody payroll are you on?! The motive here is quite clear: people are getting fed-up with the vulture tactics of the current financial system that rakes in profits for the already very wealthy, at the expense of others, who are already struggling. If you think about shorting stocks from an ethical perspective, it suddenly becomes a very dark grey area... To get back to the behavioural science. Is it irrational to buy overpriced stock? Without context, definitely. Is it irrational to want to rise up against a financial system that doesn’t have your best interest at heart, is untransparent at the best of times and corrupt at the worst of time? Nope. Seems like a wise choice to me. Within the spectrum of your availability (read: without going bankrupt), it is time we put our money where our mouth is. We need to show, through non-violent action, how bad the situation has gotten, and how we feel about it, and them. Let’s hit them where it hurts: in the money bags. Viva la revolution!