Reddit traders cause Wall Street havoc by buying GameStop

Amateur online traders fueled by discussions on Reddit sent shares of a struggling video game retailer flying Wednesday, a moment that is underscoring the divorce between the skyrocketing values of companies and the pain in the real economy.

GameStop, a video game retailer struggling to keep up with direct downloads even before the coronavirus pandemic, saw its share price jump to $347 per share on Wednesday. Overall, its share price has risen more than 1,800 percent in January.

It’s not the only seemingly imperiled company that has seen its stock soar because of buys by the nearly 3 million users on Reddit’s subforum r/WallStreetBets (WSB) either.

Shares of theater chain AMC rose 302 percent, the holding company used to liquidate Blockbuster Video’s assets rose 120 percent, Nokia rose 38 percent and BlackBerry rose 33.4 percent Wednesday, while the stock market on the whole took steep losses.

Most if not all of these companies have bleak financial futures, but they’ve become favorite targets of thousands of self-starting day traders using a proliferation of trading apps such as Robinhood. 

The trading community on WSB has grown rapidly since the onset of the coronavirus pandemic, which left many people jobless and with nowhere to go but online. The subreddit was viewed 300 million times in March, according to one of its 10 moderators, up from 30 million in December 2019.

“It’s gotten a lot busier very, very quickly,” the moderator OPINION_IS_UNPOPULAR told The Hill in an interview. “And these past few days, especially, are absolutely game-breaking.”

GameStop has been the primary focus of the forum, which briefly went private on Wednesday evening before opening back up.

Some users, primarily DeepF—ingValue and delaneydi, had started arguing as early as September 2019 that the retail chain’s stock was being undervalued by the market. They also identified that several hedge funds had been betting against it using a tactic called short selling, which is effectively a bet that a stock’s price will fall.

The proposed strategy picked up significant steam in the last year, especially with DeepF—ingValue sharing updates as his initial $53,000 investment in GameStop ballooned. The Redditors have bought massive numbers of the stock and are holding onto it, forcing the hedge funds that had shorted the stock into something called a short squeeze.

A short squeeze is a tactic used by investors to force short sellers of a certain stock into a cycle of deep losses by driving the price of that stock higher. As more investors buy the shorted stock for higher prices during the squeeze, short sellers are also forced to buy shares to fulfill contracts, which puts more upward pressure on the share price.

Many of the users, who include both professional financial analysts and hobbyists, are betting that the stocks they’ve homed in on will keep climbing. Others are being more cautious.

The WSB moderator told The Hill that the team has been focused on trying to educate the influx of new users on the forum about the potential risks of investing.

“It seems like some people are taking much bigger risks than they necessarily can afford, and that is something that concerns me,” they explained.

It’s unclear how long WSB’s epic run will go and what will eventually stop it, but Washington and Wall Street are paying close attention.

Treasury Secretary Janet Yellen is monitoring the steep rise in GameStop’s price, the White House said Wednesday, and Federal Reserve Chairman Jerome Powell sidestepped several questions about sky-high equity prices during a Wednesday press conference. 

The Securities and Exchange Commission (SEC) said in a Wednesday statement that it was monitoring “on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”

Some legal experts think those involved in pushing GameStop and other shares higher could face liability.

“This looks an awful lot like market manipulation, and I suppose it could rise to the level of securities fraud,” said a securities lawyer in Washington, D.C. 

The attorney added that while there are likely legal ways to pull off a short squeeze, “ginning up interest among perhaps unsophisticated investors to build that momentum” could resemble schemes that have previously drawn SEC charges.

“How many times is the SEC going to let them do this before they say, ‘OK, this is clearly manipulative and has to stop,’” the attorney said.

Former SEC Chairman Arthur Levitt Jr. argued in an op-ed Wednesday that the agency should aggressively crack down on “rumormongers” that use online forums to drive stock purchases before the rally got out of hand.

“If regulators are able to cut through the froth and the noise, introduce a little humility and doubt, they might well condition novice investors to walk before they run, and to tread carefully on a path where others have gone before — and been badly hurt,” he wrote.

Others said the havoc on the stock market was shining a light on economic inequality and the rising gap between Wall Street’s riches and working-class Americans struggling to get by during the pandemic.

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Sen. Elizabeth Warren (D-Mass.) tweeted Wednesday. “With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy.”

The WSB moderator who spoke with The Hill welcomed potential investigations by regulators, saying it would help them deal with the handful of users trying to take advantage of the forum to push their own interests.

Thousands of WSB users celebrated what they view as a win of the masses over hedge funds and financial media outlets in discussion threads.

“We aren’t Stock Market masterminds,” one user posted in a thread dedicated to planning Thursday’s moves. “Just average Americans trying to make the best out of the shit cards our Generations been dealt.”

It does not seem likely that WSB’s GameStop play will fundamentally alter the financial system. Massive funds such as Blackrock and Fidelity, for example, are raking in huge profits from their own GME stock. 

Even so, Wall Street veterans say the recent rallies could reshape the ways investors judge stock prices with unknown implications.

“The biggest risk of all of it is that the credibility of the markets themselves and their credibility as price discovery mechanisms is lost, and that’s problematic,” said Peter Cecchini, founder of research and consulting firm AlphaOmega Advisors.

“Price discovery and what it means about risk is the basis for a lot of what goes on in a capitalist society,” he added. 

— Updated 8:00 p.m.