Diamond Hands to Mars

Over the years, /r/wallstreetbets has become one of the go-to gathering places for retail (non-institutional) traders and investors. This subreddit’s community ranges from those conducting careful and thorough analyses of assets on the market to those betting their life savings for internet brownie points. Before the GameStop story exploded in popularity and coverage, /r/wallstreetbets had boasted just under two million subscribers. Then, in the last week, this community has succeeded in taking away billions of dollars from actual Wall Street. 

How did this happen?

GameStop, an innocuous firm selling video games in brick-and-mortar shops, had been in decline for many years. Demand had been shifting to online purchases and GameStop did not adapt to this change. The company’s ultimate end was nearing. 

At that point, hedge funds started shorting GameStop stock - Melvin Capital being the most prominent among them. Shorting involves selling borrowed assets with the expectation of a price decline. When that happens, the same asset can be bought back on the market for a lower price and then returned to the lender. The short seller pockets the difference. However, if the price rises, that difference becomes a loss for the short seller instead. What is more, this loss is potentially unlimited. The higher the price of the asset goes, the larger the loss. As long as the price keeps rising, there is no hope for the short seller - they have to buy the asset back at some point to be able to return it to the lender, after all.

As short sellers decide to buy back the asset in the fear of their losses further increasing with the price going up, their demand for the asset puts even more pressure on its price, spurring it to rise further. This self-reinforcing cycle is called a short squeeze.

As GameStop stock was being shorted by hedge funds, /r/wallstreetbets noticed that these institutional traders collectively shorted a staggering number of shares - a volume of more than 130% of GameStop’s total shares was being sold short. This exposed the hedge funds: the GameStop market was now vulnerable to even a relatively small number of dedicated buyers. If enough buying pressure could be exerted, the price would start rising and the short sellers would start buying in a panic - a short squeeze could be started, costing institutional traders fortunes.

It was not /r/wallstreetbets’ intention at first to cause damage to the hedge funds. Since August 2020, there have been signs that GameStop’s fate might be changed and its demise averted. Ryan Cohen, the former CEO of the pet products company Chewy, started acquiring shares in the company. With enough shares to have power in the company to make substantial changes, he said he would re-make it into the ‘Amazon of the video-game industry’, steering it away from the brick-and-mortar business into the online/e-shop world. Seeing this potential, /r/wallstreetbets started investing in GameStop for reasons of genuine interest. The phrase that has since become a meme, “we like the stock”, was actually 100% true at first. They did (and many still do) like the stock.

But then, it became about something else. Many in the /r/wallstreetbets community had grown out of the ‘08 financial crisis, in which they and their family suffered through the consequences of the Fed-enabled, Wall Street-fueled boom and bust, while financial sector executives received bailouts, giving themselves bonuses instead. Melvin Capital, the hedge fund mass-shorting GameStop stocks, became an embodiment of this corrupt financial establishment. Although in no way exceptional, this specific attempt to make money from betting on the decline of an innocuous company angered many on the forum. In an open letter boasting over 110 thousand net upvotes in less than 12 hours, /u/ssauronn later declared:

“To Melvin Capital: you stand for everything that I hated during [the ‘08 crisis]. You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ‘08 crisis were not punished. … Your ilk were bailed out and rewarded for terrible and illegal financial decisions that negatively changed the lives of millions. I bought [GameStop] shares a few days ago. … And I’m holding. This is personal for me, and millions of others. … I’m making this as painful as I can for you.”

And so they are. In the last week, more and more users on /r/wallstreetbets have jumped on board the GameStop Infinity Squeeze. As long as they hold their stock and do not sell, Melvin Capital and other investors shorting GameStop stock will keep losing money. Melvin, ‘one of the top performing funds on Wall Street’ had lost 30% of its $12.5 billion in the 3 weeks since the start of the year before having to be ‘bailed out’ last Friday through a $2.75 billion cash injection from Citadel LLC and Point72 Asset Management. This money was ‘vaporized’ almost instantly, as the hedge fund used the injection to actualize their losses and exit their failed short positions. ‘Unlike many other hedge funds, Melvin has an expansive and aggressive short book.’ There are rumours that Melvin Capital will file for bankruptcy ‘as soon as next week’ as it was forced to liquidate its Alibaba holdings to cover the exit from GameStop, which had become the most traded stock in the world on that day, topping the likes of Tesla, Apple, or Microsoft.

On the other end of this fight, the numbers of those on /r/wallstreetbets and elsewhere who invested in GameStop are in the green. Often, these are (or at least claim to be) regular private individuals for whom this newly-earned money is of enormous value. Some supposedly plan on using the gains to pay for family medical care, while others intend to differentiate themselves from the hated Wall Street by donating a portion of the money to charities.

Chamath Palihapitiya, a Canadian-American venture capitalist was one of the most high-profile people involved with the rise of GameStop stock. After asking his Twitter followers on January 25th for tips on “what to buy tomorrow”, Redditors convinced him to pick up GameStop. After buying 50 thousand GameStop shares the following day, spurring many others to do the same, the stock skyrocketed. While already high at $87.61, 24 hours later, GameStop stock price reached a peak of $371.82, according to Yahoo - a rise of 424%.

Amid this surge, Elon Musk expressed his enthusiasm for GameStop, or, more likely, for the /r/wallstreetbets investors behind it and the idea they represent.

In an interview with CNBC, who had become a particularly hated mouthpiece for the hated Wall Street in the eyes of /r/wallstreetbets, Chamath Palihapitiya defended the subreddit’s squeeze of Melvin Capital and Wall Street in general. After announcing that he would donate his gains of $500,000 to the Barstool Fund, supporting small businesses, he laid the blame for the money lost by Melvin Capital at their own feet. Had they not engaged in predatory practices through which they overexposed themselves to the otherwise limited power of retail investors, they would not be in such a terrible position now.

“I think what you’re seeing is essentially a pushback against the establishment in a really important way. … When you look at GameStop, a normal person would say: ‘How can you have a 136% short interest; how can you be short 40% more than actually exist in the world?’ To a normal person, that doesn’t make any sense. But to a Wall Street mathematician, that’s the game that has been played for years - and that game came undone. … What I learned is that people can do fundamental research and come to a point of view that is diametrically opposed to organized capital, and they can be right. … It’s not my job to defend highly compensated hedge fund managers against losses. And just the fact that after one time those folks lost, they can belly-ache and cry on national television, to me is a joke.”

“This is an example of: If you are going to so massively oversell a company to the extent that you’re selling 40[%] more shares of that company that don’t exist; and all of a sudden other folks are like: ‘Wait a minute! This is gonna get squeezed,’ and they buy it - that’s just a smart trade. Retail saw it, Wall Street missed it, they paid the price.”

In response, the CNBC reporter claimed that such a situation is worrying because the squeeze “calls into question the integrity of the stock market”. Such a response was something the /r/wallstreetbets would exactly predict. To them, this was a prime example of institutional, well-connected players on Wall Street trying to protect their privileged position in the stock market and marginalize anyone who would challenge them. For /r/wallstreetbets, it was clear that the corporate press would be on the side of Wall Street against ‘the little guys’ winning some of the spoils, and they were more than happy to point this out.

Amid the hot news, large names and institutions started calling for /r/wallstreetbets to be deplatformed, punished, prosecuted, or otherwise stopped from their participation in the market. Nasdaq CEO suggested that trading of GME on the exchange should be interrupted so that institutional investors could ‘recalibrate their positions’ against the subreddit. A guest on Fox News proposed that people on social media should be banned from ‘talking about short stocks’. Ali Breland of Mother Jones has tried almost immediately to tie /r/wallstreetbets to the mid-century Germans. NPR described the squeeze as ‘harassment’ of hedge fund managers. Financial Times attempted to poison the well against the community by labelling ‘some of them’ as ‘alt-right supporters’ (only later removing the ‘speculative’ reference). US president Biden’s team had reportedly begun ‘monitoring the situation’ and the US financial regulator SEC had been ‘working with our fellow regulators to assess the situation’.

Then, /r/wallstreetbets was blocked from Discord. Although their server had been terminated in the middle of this news cycle, Discord tried to claim that this had been done due to the server having been engaged in ‘hate speech’, ‘glorifying violence’ and ‘spreading misinformation’ ‘for some time’. 

A /r/wallstreetbets spokesperson commented on the ban, explaining to Lotuseaters.com that the server had been brigaded by individuals with intentions to destroy it. According to this community member, newcomers would post ‘racist’ messages and then mass-report the server for hosting them:

“They did these false flag attacks en masse. We had informed Discord staff about this, they understood, they understood we were doing all that we could to moderate that, they know this has existed for years now. Only now they choose to whack us over something that happens to EVERY large Discord server.”

In a new statement to CNBC, Nasdaq CEO Adena Friedman said that the exchange had begun tracking ‘social media chatter’. ‘She said the Nasdaq will halt trading if they link chatter to unusual activity in a particular stock.’ This is despite Friedman adding that ‘it’s unclear’ whether what /r/wallstreetbets does ‘would be considered illegal by the SEC.’

Robinhood, a popular app for retail investors, has blocked more purchases of GameStop and several other ‘hot’ stocks, while still allowing sales. A similar policy was instituted by another platform, eToro. Such a restriction will cause the price to come down, as long as people are willing to sell, flooding the market. In response to what /r/wallstreetbets calls ‘the definition of market manipulation’, many calls have been made for a class-action lawsuit to be started, often amassing tens of thousands of net upvotes. At least one such lawsuit has already been filed and /r/ClassActionRobinHood has been set up. In addition, Robinhood began selling their users’ GameStop shares without their request or consent ‘for their own good’.

The /r/wallstreetbets spokesperson sees the moves by Robinhood and others as outrageous:

“They have shorted the stock and then told institutions to stop buyers. This IS manipulation. This IS fraud. This is corrupt. It needs to be called out for what it is.”

Not everyone is in support of the hedge funds. Many prominent personalities have come out in support of /r/wallstreetbets from across the political spectrum. For example, Rep. Alexandria Ocasio-Cortez said:

Dave Portnoy, an American celebrity, expressed his support: “As it turns out, [Robinhood] is the biggest frauds of them all. ‘Democratizing finance for all’ except when we manipulate the market cause too many ordinary people are getting rich”. At the co-founder of Robinhood, Portnoy tweeted:

Donald Trump Jr. also weighed in, calling out the repressive practices of the trading app: 

Emboldened by this support, the /r/wallstreetbets community is not backing down. Mars is the destination. According to a member of the community, the total sum of money involved in the short-selling of GameStop and other assets over-shorted by Melvin Capital is currently ‘over 90 billion’ dollars. Press reports already cite numbers upwards of $70 billion. ‘That is how much they stand to lose and more’ the higher the prices get. ‘Eventually, they will run out of assets to put up for collateral to borrow more non-existent [GameStop] shares.’ 

As of the morning of 29th January, the /r/wallstreetbets is full of posts calling on everyone to hold their GameStop stocks. To cash out is not an option. For many of the community traders, this is not about money anymore. They are taking a stand against the riggers of the stock market game. They might go down in flames but they will have made history.