Andrew Wong (V)
The Wall Street Bets Reddit Community, affectionately referred to as r/WallStreetBets, proudly describes itself as “like 4Chan found a Bloomberg Terminal.” So-called YOLO (“You Only Live Once”) trades are the order of the day on this subreddit, with users dumping thousands of dollars into high-risk, high-volatility trades that essentially treat the stock market like a massive casino. Upon visiting the board for the first time, users are greeted with posts on dozens of these potential YOLO trades that have the potential to either make you a millionaire, or absolutely rob you––usually the latter. Yet even as these YOLO trades go bust, many of the Redditors take pride in their massive losses, posting pictures of hundreds of thousands of dollars lost on high-risk options and trades.
However, when these trades do go right, one can become a millionaire practically overnight. This was the case with Gamestop (GME), a YOLO trade started by a user u/DeepF——Value, a 34-year-old financial educator from Massachusetts named Keith Gill, who mostly posts cat memes on Twitter and Reddit. Gill originally placed $54,000 on GME in September of 2020, when GME traded at roughly $8.50 a share. The bet soon gained momentum on r/WallStreetBets when Gill posted an update on January 11, 2021. Users started buying the stock en masse, sending the price to about $65 a share by January 22.
Wall Street hedge funds soon took notice of this sudden uptick in GME’s stock price, and immediately saw an opportunity to make some quick money. GME’s stock price was indeed heavily overvalued: the company itself was not expected to turn a profit until 2024, and with the COVID-19 pandemic, it was in severe financial distress. Expecting the stock to nosedive owing to Gamestop’s precarious financial situation and poor fundamentals, investors short sold the stock. By January 22, 140% of GME’s public float had been shorted, making it the most shorted stock on the market.
Seeing how GME had been extremely shorted by Wall Street hedge funds, members of r/WallStreetBets soon found themselves with a golden opportunity. If they could get users on the board to buy more shares of GME (which would increase the stock price), hedge funds would have to buy back the stock to cover, which would further increase the stock price and cause a short squeeze, thus sending the stock price soaring.
On January 25, the plan was put into motion. Swathes of users bought GME (nearly 175 million shares were traded that day), pledging to send “Gamestop to the Moon!” The internet soon took notice and “GME to the Moon” was trending on multiple social media platforms that day. Influencers hoping to make a quick buck posted screenshots of their positions and asked their followers to buy into the stock. Millennial college students looking to pay off their college debts hopped on the trend, dumping their stimulus checks and whatever savings they could scrape together into GME. Gen-Zers, many of whom had never even touched the stock market before, started accounts on free trading platforms such as Robinhood to hop on the GME rocket and become part of history. Never before in stock market history had so many people been united together in a singular goal to buy a stock.
This sudden influx of people buying GME caused the stock’s price to rise sharply, as expected. A gamma squeeze was also triggered by traders scrambling to buy options in order to hedge their short positions and protect themselves from further risk, which further increased the stock price. By the time the market closed on January 26, GME had risen 92.71% to a price of $147.98 per share. During after-hours trading, Tesla CEO Elon Musk took to Twitter and posted a link to the r/WallStreetBets subreddit with the caption “Gamestonk!”, sending the price of the stock to $200. By the time the market closed the next day on the 27, GME was trading at $483 a share, an increase of almost 750% from its stock price just a week prior, and an increase of more than 1000% for the entire year.
In the span of two days, Redditors and YOLO investors who had placed thousands of dollars into GME found themselves with millions of dollars in newly acquired wealth. Meanwhile, hedge funds who had dumped billions of dollars into short positions on GME found themselves losing their entire position to the short squeeze. Morgan Stanley reported that it had seen some of the largest de-grossing actions in nearly 10 years, meaning hedge funds worked to cover their short positions and to sell stock in other companies in order to limit their volatility exposure as GME’s stock price took off. Other funds, who had bet big on the GME short, simply couldn’t cover their losses. Among the biggest of these losers would be Melvin Capital, a $12 billion hedge fund who had staked out a multibillion dollar short position on GME. In the wake of the short squeeze, Melvin found itself losing nearly 30% of its value on its failed GME short, necessitating a $2.75 billion buyout from Citadel and Point72 Asset Management in order to prevent the fund from going under.
As of the time of writing, GME is now trading at roughly $58, thanks to a combination of brokerages restricting trading of GME, short ladders by hedge funds in order to force a selloff, and a loss of interest from retail traders. Wall Street itself has been reminded that retail traders, ordinary people, are still very much a force on the market, and they too, have as much of a right and ability as do those working in multi-billion dollar hedge funds. This event, when a group of retail investors, redditors, millennials and Gen-Zers all came together and managed to upset Wall Street, will certainly go down as an event to remember, an event that will help to define the Millennial and Gen-Z generations.