Gamestop and Reddit Saga: We all had fun watching series like scam 1992. These shows make it inspiring to watch as an underdog finally sticks it up to the rich guy( aka bears in the show) and at the same time sets a warning for greed. But can this be done in real life, that too in today’s day and age? Better yet, use the same investing strategies used by the ultra-rich in order to create a transfer of power and wealth.
Something similar has happened in the US but 1000 times more inspiring. As it includes lakhs of retail investors grouping and standing up to the Wall Street. In this article, we take a closer look at the Gamestop saga, the Redditors who inspired it, who won, and obviously who lost.
What is r/WallStreetBets?
r/WallStreetBets is a community on the social media platform Reddit. The community was created in 2012 by the then 30-year-old Jamie Rogozinski. The participants in this subreddit platform would discuss stock and options trading. Although the community only had a few thousand users for several years it grew to over 1 million during the crash of 2020.
This sudden growth can be attributed to job loss during the pandemic and the majority of the population stuck at home looking for an alternative source of income.
The revolution that is talked about today started off as a simple opinion posted by one user who went by the name of DeepF#@kingValue. DeepF#@kingValue aka Keith Gills (aka dada by his 2 y.o daughter) worked as a “financial-wellness education director” for Massachusetts Mutual Life Insurance Co. He began analyzing a company called Gamestock.
Gamestock had a business model where they would sell video games through their various physical store locations. But during recent times the business had taken a hit as fewer people would visit gaming stores as most games could be downloaded. In addition to this online stores like Amazon had taken away a significant portion of their business. The pandemic on the other hand had hit them hard as they dealt only through their physical stores.
Gamestop a Good stock?
But Gill had a different opinion. His analysis brought him to the conclusion that the company was undervalued. He arrived at this after going through their financial statements observing that the company had a lot of cash and could easily pay off their debts and with some better management he believed that they could even recover.
In addition to this, he also believed that technological advances threatening Gamestop were overstated. He further backed his analysis by pulling up articles showing that the move to digital was slower. In addition to this, he also noticed that new gaming consoles were soon to be released by Sony/ Xbox could bring Gamestop back on track. He released all his analysis on Youtube under the username ‘Roaring Kitty’. Many users disagreed with him but a few Redditors saw that he did have a point. In December Gill invested $53,566 into the stock.
Surprisingly Micheal Burry, an investor on whom the movie ‘The Big Short’ is based, also believed in Gamestock and invested in the company. These two however were unrelated. But what neither of them would have predicted is that the stock would increase 26 times from its lows in December.
Bankrupting Institutional Investors for Dummies
During the same period last year, r/WallStreetBets also noticed that over 84% of the Gamestock shares were held as short positions. This is very unusual for a stock. This meant that several hedge funds had colluded to bet that the share price would fall. Sadly for Gamestock, their shares fell further when they announced that they had failed to meet their estimates.
This in turn made these hedge funds millions. They could have sold after making their initial gains but they stayed put. The stock now had a 138% max short position. This was the single most shorted name in the U.S. stock market, according to FactSet. This showed that despite the stock having such high short interest the hedge funds were still greedy and awaited the shares of the company to hit the bottom. Sadly for them and luckily for armchair investors, some Redditors caught this.
In 2019 another investor had posted a 7 point document on Reddit Titled “Bankrupting Institutional Investors for dummies, ft. Gamestop.”. Redditors pointed out that this could now be used in the stock. If they all worked together they could create something called “Short Squeeze”.
What is a Short Squeeze?
A short squeeze occurs when the price of stock rapidly increases. The Redditors planned to do so by increasing the demand for the shares by purchasing available shares. This would force those who had bet against the stock i.e., in this case, the hedge funds to abandon their short positions. In addition to this, the hedge funds in order to cover their losses would be forced to buy the shares in the market further increasing the demand and hence the price too.
The Redditors realized that the hedge funds were exposed. In addition, most of the hedge funds had borrowed money to place these bets. There could be no telling to what extent of losses that the hedge funds could incur. On the other hand, the maximum losses the individual Redditors would face is to the extent of the fall in the share price. This had the potential to severely hurt wall street.
Gamestock price increase
On Jan 11, Gamestop appointed 3 new board members. The new directors all had extensive experience in e-commerce, online marketing, finance, and strategic planning. This news gave an opening to the Reddit army. By Jan 13 the shares of Gamestop surged by as much as 94%(intraday), its highest in 5 years. The price of the shares kept increasing.
On Jan 22nd the shares once again soared by nearly 70%. The prices touched $72.88( the price was at a low of $12.72 in Dec). Most media outlets associated this unprecedented increase in the price of new members joining the company’s board.
The hedge funds however stayed put and kept denouncing the stock on platforms like Twitter. By Jan 23rd it was clear that there was an angry mob rooted in Reddit that had driven the prices of Gamestop to new heights. The criticism posted by institutional investors was not taken lightly on Twitter. Andrew Left of Citron Research was forced to end his bearish commentary on the stock after he and his family were harassed by an angry online mob. He also stated that there were attempts to hack his Twitter account.
“What Citron has experienced in the past 48 hours is nothing short of shameful and a sad commentary on the state of the investment community,” Left opened up his letter which he posted on Twitter. Left posted his letter to a new Twitter account, @CitronResearch2, because “Twitter is working through multiple hack attempts,” Left said. He also clarified that he is stopping his commentary not because his views on the company had changed but because an “angry mob who owns this stock has spent the past 48 hours committing multiple crimes,”.
The shares of Gamestop had increased 400% to $93. By now it was clear that the rally was fueled by individual investors, encouraging each other on social media to buy GameStop shares and options. The short squeeze that the armchair investors had fought for had arrived and hedge funds were looking for an exit strategy.
Hedge Funds were now forced to buy back the shares they had sold short which further drove the prices even higher. Gamestop buy orders outnumbered sell orders by more than four-to-one. It was now the single most traded stock in the US – its volume matched that of the five biggest tech giants combined. The shares of the company were briefly worth more than $490 on the 28th of Jan. The company had gone from being worth $200 million to more than $28 billion.
It wouldn’t be fair to say that the shares were driven by r/WallStreetBets alone. Several investor celebrities like Elon Musk, C. Palihapitiya, Cathie Wood. tweeted in favor of the stock once they realized what was happening. Their motivations could vary.
Take Elon Musk for example who tweeted only one-word “Gamestonk!” — with a link to Wallstreetbets. Elon has always maintained a hate relationship with hedge funds as they have targeted Tesla stocks in the past. Conveniently for Elon, the same hedge funds are caught up in the fight against WallStreetBets.
Soon other stocks too were targeted by armchair investors. These stocks soon came to be known as Meme stocks as they simply were agreed on online. This led to the bankrupt video-rental company called Blockbuster stocks to surge by 774% on 26 Jan and 302% on 27 Jan.
The company had filed for bankruptcy as early as 2010 and was subsequently destroyed by Netflix and Prime. There currently only exists one Blockbuster store today.
BlackBerry and AMC
Shares of BlackBerry Ltd. became meme stocks as they too began to rally. This was followed by shares of AMC Entertainment – a struggling movie theater chain quadrupled at the opening bell on Jan 27th. It was now clear that the WallStreetBets army was targeting Wall Street’s most shorted stocks in order to hurt the hedge funds.
The trading of these shares was halted multiple times a day due to their volatility. Shares of BlackBerry had posted gains for the seventh consecutive session. The management of the company was questioned over the sudden price increase but they told regulators they had no clue why its stock was surging. The stock of the once-popular smartphone maker has surged about 172% year-to-date.
Another company Macerich, a real estate investment trust based in Santa Monica, was heavily hit with losses during the pandemic. The company owns 52 shopping centers across the U.S. The stock had lost 84% of its value over a three-year period ending Dec. 31, 2020, due to the shift towards online shopping. Macerich shares jumped 68% in four trading sessions thanks to r/WallStreetBets.
The Reddit army also targeted a series of cannabis stocks. Shares of cannabis stocks like Tilray soared 50%, Aurora Cannabis rose 20% and Aphria rose 10% on Feb 10. This however was short-lived as the shares tanked the next day as the retail investors lost momentum.
Wolfe Research began advising their institutional investor clients to avoid fighting the band of newbie day traders altogether and the stocks favored by them altogether. Yin Luo who headed the research wrote “Given the highly speculative nature of the Reddit buzz signal and retail investor behavior in general, we recommend using retail participation as a risk factor instead of an alpha signal.”
Losses suffered by hedge funds
On Jan 28th Melvin Capital and Citron finally gave up the fight against the armchair investors. Citron Research’s Andrew Left was vocal against GameStop. He predicted that GameStop shares would fall below $20. Citron Research covered its short with GameStop in the $90 range taking a 100% loss.
Melvin Capital too suffered the most losses. The company had begun the year with $12.5 billion but currently is valued at $8 billion. This recent valuation includes the emergency investment of $2.75 billion received from Citadel LLC, its partners, and Mr. Cohen’s Point72 Asset Management on Feb 1st. The company’s asset position had reached its lowest since the company’s start in 2014.
What were the profits?
DeepF#@kingValue aka Keith Gills who started the revolution had invested $53,566 in GameStop call options. He was able to turn this into $48 million. Most Redditors would say that it was well deserved as he was able to direct everyone’s attention towards Gamestop which eventually led to the shift of power in Wall Street. Keith Gill however stated that “This story is so much bigger than me … I support these retail investors, their ability to make a statement.”.
Many investors too have testified stating that it was Gill’s advocacy that helped turn them into a force powerful enough to cause big losses for established hedge funds. Reddit user reality_czech commented, “Your steady hand convinced many of us to not only buy but hold. Your example has literally changed the lives of thousands of ordinary normal people. Seriously thank you. You deserve every penny,”.
Several small investors who profited were able to pay off their student loans. Some even have decided to give back to the community by donating their earrings from the trades to charities. An inventor as young as 10 years old converted his/her investment to $3000.
Wall Street always wins!
However retail investors were not the only ones who had benefitted from Gamestop. Private Equity firm Silver lake cashed in AMC shares on Jan 31st for a $113 million gain during this week’s trading. California-based private equity firm Menlo Park sold its positions through several open-market transactions on Wednesday, raising $713 million.
AMC themselves too raised $304.8 million by selling their shares during the week. AMC Cheif Executive Adam Aron said in a statement “ …any talk of an imminent bankruptcy for AMC is completely off the table,”. AMC’s largest investor Ontario Teachers’ Pension Plan, sold its entire stake of 24.56 million Macerich shares at $20.25 each after shares soared more than 100%. Gamestop’s biggest shareholders became billionaires overnight.
Hedge funds like Senvest Management LLC, Messrs. Mashaal’s, and Gonick’s firm also made money from Gamestock shares. Investment firm Blackrock made a combined profit of $2.4 billion.
The shift of power to the retail investors was short-lived. This was because soon various institutions began doing everything they could to limit these retail investors. Discord(social media platform) soon banned the WallStreetBets community. Facebook too banned the community group on its platform which had 157,000 members.
This however did little to stop their advance as the Reddit community grew from 5 million to 8 million in a few days.
The worst however was yet to come. Robinhood then banned the purchase of the stock. This further solidified doubts that the trading app was siding with the large hedge funds. This was ironic as the trading platform was named after a legendary outlaw who stole from the rich to give to the poor. Robinhood placed restrictions and halted the purchase of certain stocks.
The total stocks restricted amounted to 50. These included stocks like Gamestop, Nokia, Blackberry, Express, Koss, etc. Basically every stock that the WallStreetBets army had increased the price of. The restrictions include the ability to only buy one share of GameStop Corp. But the investors were still allowed to sell. This created a shift in the demand and supply of the stocks resulting in falling prices.
Investors believed that this was a means used by Wall Street cronies to cripple the individual investor. After all, Robinhood did receive funding from hedge funds like Citadel. In addition to this Robinhood also includes hedge funds in their business model. They relay information on trades made by individual investors to hedge funds. Robinhood has made $700 million by selling user data to hedge funds.
What was so far a profit motive would soon turn political? This was because it now seemed that the rich would do anything to ensure that the retail investors never win.
Papa Elon vs. Vlad the Impaler
In the midst of the turmoil, Elon Musk aka Papa Elon on Reddit made an appearance on Clubhouse along with Robinhood Co-founder and CEO Vladimir Tenev. Musk went on to grill Tenev over the restrictions put in place over retail investors by his company. Tenev went on to clarify that meme stocks had led to the app experiencing “unprecedented volume” and “load on the system.” as the net buys increased exponentially.
This led to the National Securities Clearing Corporation demanding $3 billion from the company during wee hours. This was due to the surge in trading volumes. The clearinghouses that help process and settle trades asked them for more cash to cover the transactions. Clearing firms, such as the Depository Trust & Clearing Corp., require brokerages to post more of their own money in riskier times to insure against losses. Tenev later clarified that this amount was later reduced to around $1 billion. The sequence of events also involved meme stocks being restricted.
In order to meet these cash demands, Robinhood was forced to raise more than $1 billion from its existing investors.
The Hate towards Robinhood
These restrictions placed by Robinhood affected their popularity immensely. The top free app in App stores in the US received 275,000 one-star ratings. Out of these Google removed nearly 100,000 in order to put the app back at a four-star rating. In addition, Robinhood was charged with multiple class-action by retail investors for market manipulation.
Sadly there was nothing much that these lawsuits can do as Robinhood is protected by its user agreements from potential lawsuits. The user agreement states that Robinhood “may at any time, in its sole discretion and without prior notice” prohibit or restrict users’ trades.
Billboards began to appear around the US encouraging investors to keep buying Gamestop and Redditors encouraged each other to not sell. Small protests were held in the streets and before you know it the news had reached the White House and Capitol Hill.
DeepF#@kingValue loses $13 million
DeepF#@kingValue came out and stated that he had lost $13 million but would still keep holding the shares. Gill stated that he had been holding 50,000 shares of GameStop as well as 500 call options. In the midst of all this, there were still some short-sellers who were not surrendering despite nearly $20 billion in one month. They could finally breathe a sigh of relief as the prices were made sure to fall. He also would be facing federal regulatory scrutiny for his involvement.
The employees trading app Robinhood too began expressing their unease with the events that transpired. This was expected as the app was created to support retail investors. Employees felt it went against Robinhood’s stated mission to “democratize finance” for individual investors.
Elon Musk once again came out in support of retail investors this time to back Rep. Alexandria Ocasio-Cortez spoke up against the trading restrictions placed.
AOC tweeted in part, “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.”
Musk replied: “Absolutely, u can’t sell houses u don’t own, u can’t sell cars u don’t own, but u *can* sell stock u don’t own!? this is bs – shorting is a scam legal only for vestigial reasons.
The Saga during Superbowl
Meanwhile, Robinhood CEO was called to testify on Capitol Hill over allegations put forward against the company. Friday last week the restrictions placed on Gamestop were removed. During the Superbowl, viewers were subject to cringy adverts placed by Robinhood celebrating amateur investors.
A similar advert placed by Reddit was more than welcomed. The restrictions were eventually lifted which led to an initial increase in the price of Gamestop before once again falling to $51 by Feb 11.
Reddit celebrity Keith Gill appeared at a Congressional hearing along with the CEOs of Robinhood, Citadel, and Melvin Capital on 14 Feb. In the hearing, Gill made his investment motives clear. When asked about his investments in Gamestop he replied “I do find that it’s an attractive investment at this price point,”. Gamestop was trading at $42.88 at the time.
He also went on to say that his investment in Gamestop was based on fundamentals. He also stated that “… my particular approach to investing is rather aggressive and may not be suitable for anyone else. For me personally? Yes,”.
Vlad Tenev testified prior to Gill. In his prepared testimony, he stated that “any allegation” that Robinhood was helping hedge funds by limiting trades on certain volatile stocks was “ absolutely false.” He also went on to clarify why his company was forced to limit trading on securities due to clearing house requirements and also highlighted the steps taken to ensure that this does not happen again.
Melvin Capital founder Gabe Plotkin said that his firm was targeted by WallStreetBets in part due to anti-Semitism.
Later that week Keith Gill posted a screenshot on Reddit showing that he had increased his Gamestop holdings. The screenshot of his brokerage account showed that he bought an additional 50,000 shares of the stock.
Despite the ugly outcomes for all sides, the movement has inspired a movie in the making. MGM has acquired the book proposal to be titled “The Antisocial Network” from author Ben Mezrich. This book will look to tell the story of “a ragtag group of amateur investors, gamers, and internet trolls who brought Wall Street to its knees.” In addition to this MGM also has acquired the rights to a film adaptation.
The Gamestop Saga shows how a simple quest to make profits has now turned into a political statement. One thing that is sure to happen is hedge funds will henceforth take precautions before directly engaging against meme stocks. Robinhood however has been forced to postpone its IPO in the wake of a retail investor backlash.
This grudge poses a massive risk to Robinhood as retail investors could short the stocks in an attempt to exact revenge. The biggest winner through the Gamestop saga has been Reddit whose valuation has risen to $6 billion. But when it comes to our individual investments it is always best to rely on financial metrics over online memes in the future. Happy investing!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.