The Internet vs Wall Street

It’s a story that would make a thrilling Hollywood blockbuster – the underdogs who beat the corporate giants at their own game and got super rich in the process.

However, this is not a movie, but a real-life drama unfolding right now.

In recent days, mainly-amateur stock traders have come together online to drive up the share price of a struggling (but much-loved) video retailer, GameStop.

An army of rookie investors on Reddit’s “wallstreetbets” online chatroom joined forces to target short sellers, resulting in more than two million subscribers loading into GameStop’s shares.

On Thursday 28 January, the mall retailer was the single most traded name in the U.S stock market, topping Tesla and Apple!

At one point, the GameStop shares were sat at $US347.51, creating an eye-watering $2 billion in personal wealth for the company’s three biggest individual shareholders.

How it all started

The GameStop stock surge began for a legitimate reason: On January 11, the company announced it had added three new directors to its board, including Chewy co-founder, Ryan Cohen. Cohen’s investment firm reportedly had almost a 10 per cent stake in GameStop already, but he wanted to push the company further into the digital sales market.

Following this announcement, GameStop’s stock rose 13 per cent. Two days later, it rose 57 per cent and then 27 per cent. In the final week of January it rose another 93 per cent and more than doubled on 28 January.

One year ago, a single share cost around $4.00. Today It’s worth more than $200!

As you probably know, this isn’t a normal stock surge. The reason? Investors banding together through the Reddit group, ‘wallstreetbets’.

A year ago, one of ‘wallstreetbets’ subscribers named ‘DFV’ posted a screenshot of a $US50,000 investment in GameStop. Over the past week, DFV has been posting his/her growing valuable position.

As the stock price rose dramatically, driven by other users wanting a piece of the action, DFV’s initial investment of $50,000 is now worth $US47 million.

Short-Sellers Fall Short

Before the GameStop surge, short-selling hedge funds were betting that GameStop’s stock would plummet as the retailer had been struggling for some time.

Short sellers have now lost more than $5 billion in the stock, including a loss of $917 million on a single day on Monday 25 January.

Earlier that month, one short seller, Citron Capital, called GameStop a “failing mall-based retailer” and then predicted that the stock would plunge to $20. Hedge funds like Citron have been forced to buy back the borrowed shares at a higher price, which itself has pushed the stock price higher.

A generational shift

While this surge may not last long, the massive shareholder gains generated in such a short time give new meaning to the notion of instant wealth in the digital age.

Co-founder of Reddit, Alexis Ohanian, believes that this reflects fundamental change.

“In 2021, the mainstream will realise finance will be revolutionized from the bottom-up because of the internet: Robinhood investors, Alts, crypto, the list goes on..,” he tweeted.

Analysts predict that amateur investors will continue to use Reddit for tips.

“I don’t think this is a fad, it is a generational shift in how people think about investing their money,” John Patrick Lee, ETF manager at VanEck told the New York Post.

“A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard (Wall Street) and individual traders who are on the rise.”

Danger ahead

Some people have gained millions, but others might lose everything when the bubble bursts.

Massachusetts state regulator, William Galvin, called on the New York Stock Exchange to suspend GameStop for 30 days to allow a cooling-off period.

“This isn’t investing; this is gambling,” he said in an interview.

The author of The Big Short, Michael Burry, tweeted in a now deleted post:

“There should be legal and regulatory repercussions,” he wrote. “This is unnatural, insane, and dangerous.”

And for those who need a more nuanced explanation of what’s happening:

a normal person explains what’s happening on the stock market: pic.twitter.com/zKKvULCirX

— Avalon Penrose (@avalonpenrose) January 27, 2021