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- The Reddit-fueled trading phenomenon lifting GameStop, AMC, and other stocks is backed by populist sentiments.
- Cries to dethrone the establishment and redistribute wealth resemble those seen at Occupy Wall Street protests in 2011.
- The trend has all but certainly formed a bubble, but its political messaging can still live on.
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The spirit of Occupy Wall Street is back. Only this time, it’s coming from inside the stock exchange.
Over the past few weeks, as internet-savvy traders led by the Reddit subgroup Wall Street Bets have furiously driven up the stock price of GameStop, short sellers who were betting against the video game retailer have been hit hard. According to the analytics firm S3 Research, losses on the single stock have totaled more than $19 billion.
Some market commentators argue that the sudden spike in flash rallies, which have spread to a wide range of other securities around the world, is an internet prank gone viral. Others see it as a dubious, get-rich-quick scheme cooked up by more experienced investors in the forum.
But much of the internal activity on Wall Street Bets suggests that the ferocious battle over left-for-dead stocks like AMC and Blackberry is being driven by something deeper and more transformative. Members of the subreddit portray themselves as Robin Hoods of the stock market, toppling elite investors and helping to reverse America’s unprecedented wealth gap. Posts disparaging renowned hedge funds and well-heeled short sellers garner thousands of enthusiastic comments.
The group’s success has fomented a populist movement that harkens back to the chaos and spontaneity of Occupy Wall Street in 2011. But while the decade-ago protest fizzled out with little long-term impact, the Reddit traders have driven billions of dollars in losses and alerted Wall Street to the collective power of individual investors.
For Wall Street Bets, profit is no longer everything. It’s about sticking it to the establishment and proving they’re a force to be taken seriously.
Stock Market The ‘mementum’ trade
Last summer’s boom in retail trading — combined with the onset of the global pandemic — gave Wall Street Bets the collective resources it needed to hit Wall Street institutions where it hurts most. Average investors, armed with booming brokerage accounts and plenty of free time, flocked to the forum, looking to make a quick buck as the US economy remained stagnant.
Posts touting massive profits on GameStop and other highly shorted securities soared to the top of Reddit’s popularity leaderboard. That, in turn, attracted more and more novice traders to the bullish blitzkrieg, creating an army of traders capable of inflicting serious pain on hedge fund short sellers in a way that Occupy Wall Street never could. Membership in Wall Street Bets hit 6.1 million, up from 800,000 a year ago, making it the most active forum on Reddit.
In retrospect, the newfound popularity and fiercely loyal base of Wall Street Bets lent itself perfectly to the disruptive power of the GameStop trades. The retailer was among the most shorted stocks on Wall Street, meaning big funds were making massive bets that the video game retailer’s price would fall. But the sudden, Reddit-driven rally forced major funds to close their positions, which required them to buy the shares they were shorting and take a complete loss on their investments. Repeated instances of this cycle can send shares higher still, as other short sellers are forced to buy the very stocks they were betting against.
Momentum trades are commonplace in the stock market. But GameStop’s climb snowballed at a pace that has left big investors struggling to catch up — signaling what may be a bigger, internet-driven disruption in the way Wall Street does business.
“It’s really a sign that the institutions are losing some control,” Richard Smith, the CEO of the Foundation for the Study of Cycles, told Insider. “There’s a lot of mistrust of the establishment. That’s a fertile ground for using propaganda to give people a false sense of certainty.”
Dan Egan, the managing director of behavioral finance at Betterment, deemed the trend a hugely successful “mementum trade.” Rocket emoji have spread across social media platforms, as supporters signal the ability of Wall Street Bets to send shares soaring. And Reddit posts applauding the trades are receiving hundreds of dollars worth of virtual awards as users spend real-world money to show their support.
Most small investors, Egan said, aren’t joining the rally based on any understanding about things like call options. “They’re all getting here because of the price action on this stuff,” he said. “They want to have at least a little bit in it so they can partake.”
Backed by its army of profit-hungry traders, the Reddit memesters quickly toppled two Wall Street giants. Hedge fund Melvin Capital threw in the towel on Tuesday, after an afternoon surge pushed GameStop shares to a year-to-date gain of almost 700%. Citron Research followed suit on Wednesday, citing “a loss of 100%.”
In conceding defeat, Citron felt compelled to release a video insisting that it isn’t as out of touch as its Reddit foes have portrayed it. “Even though we’ve been called ‘Boomers’ many times over the past week, we understand the changing dynamics in the market,” said Andrew Left, Citron’s managing director. “We’ll become more judicious when it comes to shorting stocks.”
Each day brought new victims. D1 Capital Partners tumbled 20% in January as its short positions soured. Maplelane’s plunge of 33% was driven by put options on GameStop, Bloomberg reported. Candlestick Capital Management’s decline was in the low- to mid-teens, according to The Wall Street Journal.
Such victories surpassed anything accomplished by the youthful protesters who flocked to Zuccotti Park a decade ago. “There was real pain, real money lost by very powerful interests,” Matthew Schmidt, associate professor of national security and political science at the University of New Haven, told Insider. “Occupy didn’t achieve that in the same kind of acute way.”
Stock Market Occupy 2.0
Retail investors like those driving the GameStop gains have long served as the bottom of the food chain for market participants. They lacked the millisecond-by-millisecond data feeds that allowed big funds to perfectly time trades. Quantitative algorithms and complex investment vehicles were also reserved for Wall Street offices. Everyday Americans were encouraged to park money in diversified portfolios and look away as their investments appreciated little by little over decades.
The tide started to shift in 2015, when Robinhood launched its fee-free brokerage service. Investors who previously paid several dollars per trade could now push money into and out of stocks on their phones for free. The platform’s name came from its stated mission to “provide everyone with access to the financial markets, not just the wealthy.”
Robinhood’s gradual growth mimicked that of Wall Street Bets. Then membership began to pick up last year, as stay-at-home orders, stimulus checks, and market volatility drove millions of first-time investors into the stock market.
The investor cooperation mobilized on Reddit brought the fight to the establishment’s home turf. In a sense, Wall Street Bets turned the stock market’s driving force — greed — against it, sticking it to the 1% by encouraging the masses to jump on GameStop as a get-rich-quick scheme.
The more Wall Street Bets coalesced around the GameStop short-squeeze, the more its members applauded the effort as one of economic justice.
“What do you get when you cross an entire generation raised during a never-ending recession, and an app that lets you gamble for a shot at never having to worry about rent money ever again?” one user said in a post parodying the 2019 blockbuster “Joker.”
Another user called GameStop’s rally “the first trickle-down economics that I’ve ever witnessed actually happen.”
“GME isn’t about greed,” read a comment posted on Wednesday night. “It’s about taking back what’s ours, what we’ve already paid for.”
Stock Market Going mainstream
The shake-up in market dominance has attracted more than just markets-curious Reddit users. Politicians, internet celebrities, and even some of Wall Street’s most well-known names are cheering the underdog day traders, portraying them as a natural foil to financial greed and inequity.
“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” Rep. Alexandria Ocasio-Cortez said in a Wednesday tweet.
The next day, Sen. Sherrod Brown announced that he plans to hold a hearing on financial-industry equality when he takes the helm of the Senate Banking Committee.
“It’s time for the SEC and Congress to make the economy work for everyone, not just Wall Street,” he said in a statement.
Even some on Wall Street agreed. The market’s disruption is “a call for transparency and fairness” after years of growing inequality, former hedge fund manager Mike Novogratz tweeted.
The bigger the grassroots trading barrage grew throughout the week, the more news of it spread. “GameStop,” “Robinhood,” and “to the moon” — a popular Wall Street Bets mantra, chanted in hopes of sky-high gains — trended on Twitter. TikTok was suddenly rife with supposed investors explaining how GameStop could climb even higher.
Some of the biggest players in Silicon Valley have also backed the effort. On Tuesday, billionaire investor Chamath Palihapitiya bought roughly $125,000 worth of call options on GameStop after being egged on by many of his 804,000 Twitter followers. A day later, Tesla CEO Elon Musk joined the party, tweeting “Gamestonk!!” and a link to Wall Street Bets. The simple statement was enough to temporarily double shares in after-hours trading.
There’s a natural link between the whack-the-establishment ethos of Silicon Valley and the counter-culture impulses of Reddit. “It’s not surprising” that those who consider themselves “disruptors” are backing the trend, said Joshua Tucker, a professor of politics and co-director at the Center for Social Media and Politics at New York University. Just as Musk and Palihapitiya shook up their own industries, Wall Street Bets represents the best shot in years for changing the market’s status quo.
Even Wall Street Bets founder Jaime Rogozinski made clear that the GameStop trading is driven by more than greed. The new activists, he suggested, were accomplishing what their populist forebears only dreamed of. “Occupy Wall Street, he tweeted, “had the wrong approach.”
Stock Market What goes up…
Successfully driving GameStop shares higher is one thing. Sparking a lasting activist movement is another, and the chips are stacked against Reddit.
The trade is nearing — if not already squarely in — bubble status. There’s no “natural buyer” to support GameStop stock at $300, said Ciamac Moallemi, a professor of business at Columbia University. According to the laws of bubble physics, such a meteoric rise is likely to be followed by an equally catastrophic fall. “It’s likely that most of these people will lose most of their money if they continue in this kind of thing,” Moallemi said.
The trend has become a cultural event, but the increasing involvement of less-informed investors only amplifies the risk of a sudden burst. The trade thrives on “novelty excitement,” said Egan, the behavioralist at Betterment. But once the momentum inevitably dies down, most participants won’t have much to show for themselves, either in profits or in societal change.
“I don’t think you’ve resolved the inequality thing,” he said. “You just shifted some people from being the not-haves to being the haves.”
Some industry leaders are already trying to save the Reddit crowd from itself. Brokerage firms including TD Ameritrade, Charles Schwab, and Interactive Brokers have restricted trading of GameStop, AMC, and other Reddit darlings, looking to protect investors from entering a risky bubble. Nasdaq CEO Adena Friedman warned the exchange would halt trading if unusual price action could be linked to a pick-up in social media activity.
Robinhood made the biggest splash of all. The discount brokerage blocked users from buying several highly volatile stocks before the market opened on Thursday, leaving them to either sell or hold their positions. Clients revolted online, charging Robinhood with leaving casual investors to endure a sell-off.
It took mere hours for the blowback to reach Washington. Democratic and Republican legislators who spent years in fervent opposition united against Robinhood’s crackdown, arguing that it gave hedge funds an unjust break. Hearings in the House and the Senate are set to take place, though no official dates have been announced.
Whatever happens in Washington, Wall Street is already moving to ward off the barbarians at the gate. Hedge funds now monitor Reddit for clues of where day-traders will strike next. Firms aren’t likely to allow the same squeeze to happen again, Moallemi said, and they still possess the advantages that helped them outpace retail investors for decades.
“It’s not repeatable, because you’ve got to have a sucker on the other side,” he added. “They’re not gonna fall for this twice.”
It will take more than a week or two of big profits for the GameStop frenzy to evolve into a lasting movement. Occupy succeeded in changing the broader culture because it sparked demonstrations across several major cities, said Schmidt, the political scientist. “While you can do some amazing things online, I don’t think in the end that it creates that kind of connection with enough people.”
Another danger of online movements — especially those that operate in anonymity — is their tendency to succumb to conspiracy thinking. “People are spreading different types of information,” Moallemi said. “Some of which might be ‘Hey, if we all pile in on this trade, we’ll make money.’ That systematically cannot be true, but somehow people are believing this.”
Still, political protests over the past decade — from Ukraine’s Euromaidan revolution in 2014 to Brexit in 2016 — have demonstrated that online organizing can still pull in passionate supporters and yield desired results. And the pandemic likely adds to the strength of digital movements, as unprecedented numbers of people are spending time indoors and looking for community on the internet.
Online drives can also have staying power. The Black Lives Matter movement, which began as a hashtag, has morphed into a global call to action. The Women’s March similarly began on social media and went on to fuel two of the largest protests in US history.
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All of which means it could be dangerous to underestimate the power of Wall Street Bets to upend the financial system — and even reshape it for years to come. Tucker, the NYU professor, said the biggest mistake would be to look at the populist outrage that has been unleashed by Reddit and say: “Just because somebody joins a movement because somebody starts doing something online, that’s less real and likely to be less durable than people who start doing it in-person.”