Reddit users buy up GameStop and other stock while brokerage firms suffer

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Prior to Gamestop’s stock suddenly soaring, and prior to new revelations about how easy it is for non-professional investors to influence the stock market, a Reddit forum named WallStreetBets had been a place where people complained about Jeff Bezos and Elon Musk, similar to many other forums on the website. During this time, Gamestop’s stock had been puttering along as it had for some time. The company had been struggling financially the beginning of the previous year; at the time, it appeared they would soon go bankrupt, in part due to the pandemic closing stores down entirely and in part due to people buying games online, often as digital content.

Investors began shorting Gamestop’s stock in the fall of 2020. Naked shorts, the practice of selling a share without possessing it, is illegal in America. Covered shorts, the practice of borrowing shares from a stock loan department, involves interest. A covered short is essentially a bet that the stock price will go down. With Gamestop, that seemed like a good bet.

By the time Ryan Cohen, a billionaire co-founder of Chewy, an online pet-food service, had started getting involved with Gamestop- purchasing 12% of the company’s shares- on January 11th, the same day he was announced as a company executive, four million shorts were recorded on Gamestop’s stock.

Cohen had made his money with an online business model, adapting it to suit the needs of an increasingly common e-commerce economy. In addition, Gamestop struck a deal with Microsoft in the fall of last year which gave the company a portion of all Xbox digital sales. The people who had thought Gamestop might go under seemed as if they could be proven wrong.

Then, on January 13, something curious happened. The price of Gamestop’s stock started going up, and kept going up. From the beginning, the users on WallStreetBets made no pretenses about their goals: they were going to bankrupt a hedge fund called Melvin Capital. A short video featuring characters from an anime called Attack on Titan showcased their goals with custom subtitles. They were going to induce a short squeeze.

For those who may not know, a short squeeze forces margin calls and short covering which causes a feedback loop, raising the stock price even further, causing more problems. Liquid assets suddenly become scarce as investors attempt to maintain their positions. They still had to pay back their interest- in addition to giving back the shares they had borrowed.

The problem became such: those who shorted Gamestop’s stock when it was 4 to 10 dollars a share now had to pay it back when it became much higher- as high as 150 dollars a share. Melvin Capital, whose investments also include Amazon, Chewy, Las Vegas Sands, and Alibaba, suddenly found themselves in trouble. Rumors of an impending bankruptcy circulated. Other reports suggested the company may have lost 30% of its 12.5 billion dollar value- an estimated loss of 3.75 billion.

In other circumstances, giving back shares to the agencies from whom they were borrowed might not have been so difficult. However, Ryan Cohen had now become an insider. He could not easily trade his stocks away due to regulations against insider trading. Thus, the amount of shares available to purchase were less than what they would have been otherwise.

Reddit users entered at this time to make the problem even worse: private investors, using an app called RobinHood, bought Gamestop stocks, among others, and simply held onto them out of spite. No one could legally confiscate the stocks from these individuals and sell them at auction. Their goal was to make Melvin Capital owe more than it could pay.

For example, if one person borrows a book and promises to return it, they will be financially liable for the costs incurred. This person might in turn sell this book on eBay for an influx of cash, leaving them with no book to return. By the time the return comes due, if the book is worth much more than it initially cost- let’s say a value of 50 dollars instead of 20- the person speculating on value will have lost money. The lender will not insist on recouping the value of the book at the time of the agreement was made, but rather on the value it currently holds when the due date comes. After all, if the lender means to replace the book which isn’t there anymore, he has to pay the market price available at the time.

Shorting Gamestop’s stock has resulted in its value rising dramatically in recent days. While normally a rise in stock would be seen as a sign of success, in this instance, the opposite is true. Reddit users, some of whom have invested 100,000 dollars or more in this way, intend to hold the stock regardless of where the price of their stock may go. Their goal is not to make a profit, but to cause as much financial harm to brokerages as possible.

In response, the RobinHood app has restricted access to Gamestop stock, and others currently being purchased, held, and shorted. Users on WallStreetBets are calling for a class-action lawsuit against the app’s owners, and have begun review bombing it in the hopes of getting it unpublished.

Meanwhile, Reddit users have transitioned over to a Chinese app called WeBull to continue their activities. As of this writing, WeBull has not instituted any censorship policies or user restrictions.

The feeling from WallStreetBets is that they are winning – even if they express this feeling with screenshots from Twitter and gifs from movies.

A report from January 19 by the New York Post suggested Cohen had gained $300 million as the stock surged. 

Thus far, the Reddit users in question appear unconcerned with Gamestop’s future as a company. Phrases like “diamond hands,” “we like the stock,” and “hold tight” abound. But beneath the surface of users encouraging one another is a sense of outrage at the SEC, at America’s billionaires, at the stock market, and the economy in general. For them, buying up Gamestop stocks, as strange as it may sound, is a way of striking back against a system they believe has committed egregious outrages unchecked by any kind of regulation.

Winter Trabex is a freelance writer in Manchester and an Inklink Community Contributor.