In normal times, everything on WallStreetBets, the anarchic community of online day traders that has propelled shares of the US video game retailer GameStop up 2,200% this year, is simultaneously a joke and wholly serious.
The group, made up of more than 4.5 million members of the social media site Reddit, has been well known in certain corners of the financial community for years thanks to its unique approach to equity markets.
A classic WallStreetBets trade tends to include a strong narrative at the root, an almost alarming insight into the deep workings of financial markets as the hook, and then, the essential element, enough self-awareness that the whole thing can be adopted as a sort of quantum joke: it’s either all for a laugh or an entirely reasonable investment proposition, and it is impossible to know which until the dust has settled and the winners and losers have emerged.
Take the saga of Hertz. The car rental company filed for bankruptcy protection in May 2020 as a result of the Covid pandemic, and its stock price duly plummeted to record lows. But over the course of June, users on the subreddit began discussing the company. Here, after all, was a household name, trading at just 59 cents a stock. Wasn’t that surprisingly low? Could something not happen to rescue the company, particularly if a million retail investors piled in?
And so they did. First came those who were convinced that Hertz had value. Then came those who were convinced that enough other people would be convinced, and then Hertz really would have value. Then came those who just thought it would be fun to join in, and finally those who were attracted by Hertz’s name showing up on the “most traded” list on Robinhood, the free stock trading app that lies at the heart of much of WallStreetBet’s activity.
All of that interest was compounded by the hive mind of the community discovering an investing technique labelled “gamma squeeze”. Rather than buying Hertz shares directly, you could buy call options – a deal that lets you buy shares in the future, for a price you pick today. If that future is near, and the price wildly higher than the current price, those options are practically free, because conventional wisdom says they will never pay off. But, redditors realised, the person who sells you those options then needs to go out and buy the stock anyway, just in case the price does go up. That means if enough people buy those options, then the price of the stock will go up, for a fraction of the investment that would be required if they went and bought the shares anyway.
The end result? Hertz’s stock price grew tenfold in a matter of weeks, despite the company being bankrupt.
When the market inevitably soured – Hertz was ultimately delisted in October – some people had sold out at the top, some had lost cash, but crucially, everyone involved had had fun.
The GameStop trade began similarly. Some WallStreetBets users had noticed that the store was trading low, and caught on to the idea that it might have more upside than it was given credit for. They bought in, and joined the chorus arguing that GameStop was worth real money. On top of the “gamma squeeze” that was used with Hertz, another tactic, a “short squeeze”, was spotted – highlighting the fact that a few hedge funds had borrowed and then sold billions of dollars of GameStop stock, which they would have to buy back at inflated prices if the price continued to rise.
From there, the same predictable cycle played out: people bought in because they believed in the argument, others joined the rush because they believed there was going to be a rush, and still others joined in just because it was fun.
But this time the quantum joke has started to falter. So much money has piled into the company, from such a broad array of investors, that the wry smile is giving way to genuine emotions. One post, with tens of thousands of upvotes, recounts “the enormous repercussions” of the financial crisis, and frames the short squeeze as karmic retribution on Wall Street professionals.
“You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage,” the poster writes to Melvin Capital, the most prominent of the GameStop short-selling hedge funds. “I dumped my savings into GME [GameStop’s trading symbol], paid my rent for this month with my credit card, and dumped my rent money into more GME. This is personal for me, and millions of others. I’m making this as painful as I can for you.”
On Thursday, Robinhood and other free trading firms including Trading 212, a British competitor, announced that they would stop trades on GameStop entirely, as well as a range of other WallStreetBets-favoured stocks including the cinema chain AMC and the once-great phone maker Nokia.
One hour, and 10,000 comments later, WallStreetBets was on the warpath. “I was done buying. Now I’m gonna switch brokers and buy more. I can’t believe how hard they’re trying to fuck the little guy,” reads the top reply to the top comment.
What is not clear is how this might end, other than a lot of people losing a lot of money. But this time, they aren’t going to go down laughing.