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Thursday, May 23, 2024

Reddit vs. Wall Street

GameStop used as a blunt-force weapon against hedge funds

Between Jan. 20 and Jan. 27, stock for GameStop (GME) rose from $39.12 to $347.51, an 888% increase. In a matter of days, hedge funds like D1 Capital Partners and Melvin Capital, which had short sold GameStop and AMC (which saw a similar rise) to a nearly obscene degree, found themselves grappling with heavy losses. Melvin Capital had lost 53% of its value, requiring a lifeline of $2.7 billion from Citadel LLC and Point72 Asset Management to stabilize itself in the midst of GME’s insane rally. 

The responsible party is Reddit’s r/wallstreetbets community, a subreddit of day traders who pride themselves on incredibly risky bets and use homophobic slurs as sentence fillers. Included in the more notable financial escapades to spread beyond the site itself, is the story of a user known as “fscomeau,” who put $200,000 in puts against Apple and, over the course of a  two-hour livestream (in which he wore a rubber wolf mask), lost everything and found himself in insurmountable debt. While fscomeau was eventually outed for faking the whole thing, r/wallstreetbets has no shortage of real monetary losses—“loss porn,” or screencaps of trading accounts with losses sometimes well into six digits, remains the most commonly gilded posts in the community. Unlike fscomeau’s downfall, r/wallstreetbets’ instigation of one of the largest short squeezes in history, too, is very real.

The first sign of trouble came when a r/wallstreetbets user (whose name The California Aggie cannot, in good conscience, print here) pointed out that the ailing GameStop, which found itself grappling with a double-sided onslaught from the pandemic and the games industry’s shift towards digital ownership, was being short sold an astounding 140% of its public float. From there, it was only a matter of organization and, for r/wallstreetbets, of getting the “tendies” in order.

Hedge fund manager of “The Big Short” fame Michael Burry was one of the few to see the writing on the wall; Last spring, he purchased 5.3% of GameStop at between $2 and $4.20 a share. While he likely didn’t see a short squeeze of this magnitude in the cards, there’s no doubt that early warning signs were present for this sort of dramatic event.

After the damage became clear, the narrative, at least among the internet-minded, seemed to be that holding GameStop was an act of vengeance against Wall Street—which at first, it very well may have been—but the narrative shifted. Melvin Capital was way out after its initial staggering losses and before the hype machine started chugging along. Hedge funds, in sum, are risk averse and, as a result, not likely to stay in on securities that swing in value by the hundreds daily. 

Though this narrative of lucrative activism was dubious at best after the initial squeeze, it was apparently enough to get a substantial number of Americans to pump their hard-earned money into meme stocks, at least partially under the guise of righteous warfare against the 1%.

This, like many popular internet narratives, was easy to spread and a well-evolved falsehood. GameStop, as of Feb. 11, is sitting at $51.10—just a fraction of its 51-week high of 13 days prior. As it turns out, those who knew what they were doing were in and out before pop culture got a true hold on the situation, and the ones who paid were those late to the party. (Imagine following the Twitter hype and buying GameStop at like $300, only to have to sell at $50. Geez.)

After the horror of 2008, the steady rises in deaths of despair since the ‘90s and an ever-decreasing labor force participation rate among young people, a narrative like this was far from a difficult sell—put $500 of stimulus money into a dying company, and I can watch Wall Street get all nonplussed? (And make a pretty penny?) Sounds like a good deal. But of course, when this much cash is involved, there’s bound to be a plague of opacity when it comes to what’s really true and what’s not. It’s easy to forget that nobody is more learned and capable than Wall Street when it comes to profiting off the illusions of the middle class.

There are real ways to attack America’s woodchipper-like financial infrastructure without losing your life savings on nebulous hype waves, but unfortunately, investing in whatever stock people happen to be talking about at a given moment is not one of them.

Hedge funds were hurt, laughs were had and a lot of people made and lost a lot of money. Only time will tell whether this style of digitally-organized market terrorism is replicable, or even tenable in the first place, but some will be watching Wall Street squirm all the same.

Written by: Jacob Anderson — arts@theaggie.org


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