Around the time the January 6 Capitol rioters headed home after solid day of defending democracy by pillaging it, another pillage was warming up.
The two million members of a Reddit subgroup called r/WallStreetBets (now six million members) were posting about a video game retailer called GameStop.
The share price was then $US21 ($A27.50). On Friday it closed at $US325.
That 1400 per cent rise has turned the finance industry upside down and caused at least one big hedge fund to require a bail out.
And it looks like a fundamental turning point for finance: social media has upended the stockmarket, and the looters of Wall Street have been looted themselves.
People have been using various social media to tip stocks for a while, but what’s different about the GameStop Insurrection is the addition of protest. It’s a kind of rebirth of Occupy Wall Street, using cash instead of placards.
Or as Matt Taibbi, the journalist who famously described Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” put it over the weekend: “One group of gamblers announced, ‘F––k you!’ Another group announced back: ‘No, f––k YOU!’. That’s it.”
GameStop is a bricks and mortar video game retailer that hasn’t made any money for a while and lost $US63 million in the latest quarter. It is now valued at $US22 billion, having increased 8000 per cent in 12 months.
GameStop’s share price had been falling for years but about nine months ago it started to rise after an entrepreneur named Ryan Cohen, who had made a fortune from selling pet food online, bought 12.9 per cent of the company and went on the board to help it sell games online and escape its apparently inevitable demise.
A few Wall Street hedge funds decided to bet that he wouldn’t succeed, and started to short it.
Short selling is where you borrow shares from firms called prime brokers, like Goldman Sachs, agreeing to return them later at today’s price plus interest. You then sell the shares you borrowed, with the aim of buying them back at a lower price, so you make the difference as profit. Some hedge funds also publicly attack the company to try to drag the shares down and, hopefully, send it broke.
The r/WallStreetBets thread was created in 2012 by 39-year-old Jamie Rogozinski of Mexico City as a place for stock tipping. In mid-2019, a 34-year-old former financial educator named Keith Gill, who called himself Roaring Kitty, bought $53,000 of GameStop shares, because he thought it was a good thing. He posted that on r/WallStreetBets and started actively tipping it.
He made TikTok and YouTube videos about it and constantly posted about it on Reddit. Eventually it caught on and others started joining him, buying GameStop because they thought they’d make money. The excitement grew when Ryan Cohen bought in.
But when hedge funds started shorting the stock, the discussion in the group went from talking about how much money they’d make, to outrage about the short-sellers, to a concerted attack on them – trying to make them lose money by squeezing them.
If the share price of a stock you have shorted goes up instead of down, you are forced to buy at the higher prices, or “cover”, thereby losing money. This buying often turns into a hectic scramble, called a “short squeeze”, which is what happened with GameStop – the buying that pushed the share price up was partly Redditors and partly hedge funds scrambling to cover their positions.
The financial establishment is now, as one, bemoaning the GameStop short squeeze, including the Securities and Exchange Commission and the US Senate. James Gorman, the Australian head of Wall Street bank Morgan Stanley, told the ironically named Future Investment Initiative conference in Saudi Arabia: “There are a bunch of people that are in for a very rude awakening at some point here.”
The rude awakening of Morgan Stanley and the rest of Wall Street is now behind them.
Have the Redditors been illegally manipulating the market? Yes of course. You can’t artificially move the price of a security with the intention of harming someone else, which is why the regulators are investigating. But good luck proving anything, or even finding the villains.
Now might be a good time to short GameStop by the way. Ryan Cohen’s pet food expertise would have to generate some rather unlikely profits to justify the new valuation, so the price is likely to fall at some point, probably quite soon.
Actually Mr Cohen might already have exited stage left – his initial $US76 million investment is now worth $US2.86 billion, without him doing a thing.
If it does crash the Redditors might not lose much money individually, since as with all social media the power to tie down Gulliver comes from the collusion of many Lilliputians.
The appearance of “flash mobs” in the stockmarket is so disruptive because it’s a place where numbers still matter and so much of what happens there is already ridiculous, so that a video game store going to $325 is just kind of more of the same.
But for ordinary investors trying to make sense of a market controlled by short-selling hedge funds and algorithmic computerised traders, it’s another reason to be wary. It means that the highs and lows for any given stock could be multiples of what was previously seen as a bubble.
To some extent it’s a refinement of Bitcoin.
- Related: Elon Musk enters GameStop saga
Bitcoin is a trail-blazer, not because it is set to become a new form of money or a means of exchange (it isn’t), but for how it has revolutionised price discovery and volatility in the new world of social media.
Many of those trading Bitcoin are speculators hoping to sell to another speculator for a profit, like the tulip traders in Amsterdam in 1635, but there is also a large element of social media users, mostly young, using it as an expression of dissent against the existing world of money and the way it is controlled by baby boomer elites.
With that idea being applied to shares, and specifically the dodgy practice of short-selling, the stockmarket will never be the same again.
Alan Kohler writes for The New Daily twice a week. He is editor in chief of Eureka Report and finance presenter on ABC News