Many of today's adults spent their youths in GameStop stores. They lined up for console launches. They bought and sold games there, too. Now some of those gamers are rich after buying GameStock's stock and encouraging their friends on Reddit to buy it too. GameStop's shares rocketed higher than ever expected in the past couple weeks, and all because activity among social media investors began pushing it up. Wall Street had bet heavily that the company would fail, but as the price kept going up, investors were forced to reset their wagers. That led the stock to rocket up, and then swing wildly.
And though the share price dipped on Monday, Feb. 1, by more than 30%, many Reddit users say they're buying more GameStop stock, convinced it'll rocket even higher.
Jaime Rogozinski, the apparent founder of the Reddit community at the heart of all this, told The Wall Street Journal it's like "a train wreck happening in real time." Keith Gill, the trader in the Reddit community who helped kick off the battle, told the paper he "didn't expect this."
Last week, on Thursday alone, GameStop's stock hit all-time highs of $ per share, only to drop by more than half a minute later. It closed trading at $ the next day.
GameStop itself hasn't fundamentally changed in the past month. It's still a struggling retailer facing an uncertain future against the rising tide of online shopping. But its stock has shot up as much as 1,% -- that's not a typo -- since the beginning of the year. This dynamic's led Wall Street investors who bet against the company's future to lose billions of dollars, and the excitement is driving the hype even further.
Now playing:Watch this: What does GameStop's skyrocketing stock have to do with
Over the past couple weeks, the financial world watched in shock as GameStop stock (or "stonk" as the reddit community calls it) rose to unthinkable levels. Even Elon Musk tweeted about it, pointing his 43 million followers to a link of the Reddit community investing in GameStop, called r/WallStreetBets.
By the close of regular trading on Wednesday, Jan. 27, the stock was $ per share, up from from historic lows of around $ per share in the summer of And then in after-hours trading, it dropped by more than 37%, only to rise again. The next day saw even more dramatic moves, with the stock jumping up to $ before dropping nearly 60% to close at $ Then, in after-hours trading, it rose back up to $
Meanwhile, stock market trading apps appeared to either stop or impose restrictions on GameStop share purchasing for at least part of the day.
The popular stock trading app Robinhood drew particular attention for what appeared to be the among the most restrictive new rules. People had been raising concerns about Robinhood for a while, saying it "gamified" stock trading to a potentially dangerous degree. Now it's being accused of outright market manipulation, including through at least one class action lawsuit filed already. Robinhood, for its part, said last week that market rules effectively forced it to put those restrictions in place.
Read more:GameStop's stock spike fueled by slang from Reddit's r/WallStreetBets community. Here's what it means
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"We're seeing a phenomenon that I have never seen," Jim Cramer, a Wall Street commentator on CNBC and a former hedge fund manager, said during a segment as shares were first beginning to swing. And GameStop could be just the start. "It's insane."
This may seem like an oddball story about Wall Street investors being overrun by excited social media users. For some, it's been fun to watch those investors get taken to the cleaners by a bunch of people posting rocket emojis, saying GameStop shares will go "to the moon."
But for some on Wall Street, it's the latest sign of how social media can upend everyday life. Twitter has changed the worlds of news and politics. YouTube and Instagram have transformed the fashion, beauty and entertainment industries. Now Reddit is taking on Wall Street.
These worlds have overlapped as well. Fans of Korean pop groups, known as K-pop stans, post floods of tweets about their favorite stars to overwhelm racist hashtags on Twitter. And TikTokers banded together in attempts to confuse President Donald Trump's reelection campaign.
Now emboldened Reddit communities are talking about taking on other companies that Wall Street is broadly betting against. The Reddit crowd is already attempting to push up BlackBerry, the once-popular handset maker that now focuses primarily on selling business software. And Redditors are also targeting the struggling movie chain AMC, pushing its stock from hovering around $2 per share to more than $8 in after-hours trading. By Wednesday, Jan. 27, it closed at $ per share before dropping to $ The next day, it fell even further, to $ per share.
The Reddit community's actions have had such an impact that TD Ameritrade took the extraordinary step last week to limit share trading on Game Stop and AMC stocks, "out of an abundance of caution amid unprecedented market conditions." Nasdaq as well warned that it will halt trading on stocks it thinks are being manipulated by social media.
Meantime, traffic to the Reddit community at the center of the drama, r/WallStreetBets, is breaking records. Mashable reported that r/WallStreetBets counted 73 million page views for its discussion boards on Tuesday, Jan. 26, as stocks began to swing. Over a seven day span, it hit about million page views. Reddit is already the 46th most popular site on the web, notching more than 78 million unique visitors in December, according to comScore. And on Wednesday, Jan. 27, Reddit's mobile app tallied its biggest single day of downloads, industry watcher Apptopia said.
The whole drama's even caught the attention of Saturday Night Live, which lampooned the Reddit investors as the latest sign Wall Street isn't working.
But when the memes stop and the excitement goes away, GameStop will go back to being that struggling video game retailer at a time when gaming is increasingly moving toward streaming and the idea of stepping into a physical store is still a nerve-wracking prospect during a pandemic. At that point, stock analysts say, whoever's left holding shares will see their value evaporate.
"This is unnatural, insane and dangerous," Michael Burry, a prominent GameStop investor and one of the subjects of the book and movie The Big Short, wrote in a now-deleted tweet. His roughly $17 million investment in the company ballooned to at least $ million last week, give or take a few swings in the share price, Markets Insider reported.
No one's listening
Michael Pachter, a longtime video game industry analyst at Wedbush Securities, said he hasn't even bothered to update his stock price expectations for GameStop since shares started going crazy. "Who's listening?" he said in an interview last week. "Nobody cares what a sell-side analyst says right now."
To him, there are reasonable explanations why people could be somewhat excited about GameStop. One of its newest board members, Ryan Cohen, helped turn Chewy into one of the largest online pet product sellers in the world, before selling it to PetSmart. GameStop's also on a track to being profitable again.
But that doesn't come close to explaining GameStop's share price now. "It's a Ponzi scheme," Pachter said, referring to a form of fraud that appears to make money but in fact is only propped up by funding from new investors. "There is a point where it'll go down."
He suspects that may happen after the company reports its quarterly results in March, at which point executives and investors on the board are allowed to sell their shares.
In the meantime, industry watchers are attempting to understand what forces are at play in the drama, and what these swings say about the economy.
"When you see what's happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen," James Angel, a finance professor at Georgetown University's McDonough School of Business, told the New York Times.
One thing analysts watching wonder is whether the Reddit investors will lose their millions whenever the stock eventually crashes back to earth. Rogozinski, the man who helped found the Reddit community, said their approach to investing as more like gambling than traditional analysis and strategy. Its members, who the community identifies as "degenerates," often encourage one another to push all their funds into one stock, riding it up and down. Their posts are punctuated with phrases like "hold the line" and "diamond hands" (hold onto your stocks for a long time) and YOLO (you only live once).
He told the WSJ he never imagined the Reddit community would morph from its beginnings to what it's become. "It's a little like watching one of those horror films where you can see the bad guy slowly going up the stairs," Rogozinski said.
Indeed, even Keith Gill, the community member who helped kickstart the initial battle over GameStop, told the Journal he was surprised by what it'd turned into.
"I thought this trade would be successful," he said, "but I never expected what happened over the past week."
In the meantime, the social media hype is continuing on Reddit, where users are declaring their intention to buy and hold more GameStop shares, all to send prices even higher.
"My mom told me it's time to sell," one Reddit user wrote on a post about GameStop's stock moves. "Should I find a new mom?"
"Yes," another user answered. "The answer is yes."
Read more:Why GameStop, BlackBerry stocks suddenly jumped, thanks to Reddit
In this article, we discuss the 10 best SPACs to invest in according to Reddit. If you want to skip our detailed analysis of these SPACs, go directly to the 5 Best SPACs to Invest In According to Reddit.
Special Purpose Acquisition Companies (SPACs) have been all the rave in the financial world over the past few months as they facilitate blockbuster initial public offerings (IPOs) through mergers with startups just before they go public. According to SPAC Research, public offerings through special purpose companies raised more than $83 billion in By June , SPAC-facilitated IPOs have already raised more than $ billion through the debut of close to new companies on the stock market.
Some of the famous names to go public through SPACs include DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN). DraftKings Inc. (NASDAQ: DKNG), the Boston-based sports betting company, has a market cap of close to $20 billion and an average trading volume of 16,, On May 12, investment advisory Goldman Sachs gave the stock a Buy rating with a $77 price target.
ChargePoint Holdings, Inc. (NYSE: CHPT), the California-based electric vehicle infrastructure company, raised close to $ million in net proceeds from the SPAC-linked IPO earlier this year. The company has since reached a market valuation of over $10 billion and earned bullish ratings from investment advisors such as Jefferies and Needham. Jefferies has a Buy rating on the stock with a price target of $40 while Needham also has a Buy rating on the shares with a slightly slower price target of $
Perhaps one of the most anticipated SPAC-facilitated IPOs of the past few months has been the stock market debut of Virgin Galactic Holdings, Inc. (NYSE: SPCE), the American spaceflight company that is one of the first big private spaceflight firms to go public, ahead of competitors like SpaceX and Blue Origin. The company went public last year at a valuation of over $ billion and the share price of the firm had jumped by close to 45% till April. The firm now has a market cap of close to $9 billion. The stock is one of the most popular ones on Reddit forums.
As the clean energy business explodes around the world, firms like Nikola Corporation (NASDAQ: NKLA) have been going public. The company debuted on the stock exchange through a merger with a special purpose firm and was valued at over $12 billion. Known as the ‘Tesla of Trucking’, the firm recently announced that it had invested close to $50 million in a clean hydrogen project in Indiana. On May 28, investment advisory BTIG gave the stock a Buy rating with a price target of $18, calling it a disruptor in the truck market.
Another much-hyped IPO through a special purpose company over the past few months was the stock market debut of Opendoor Technologies Inc. (NASDAQ: OPEN), the California-based firm that runs a digital platform primarily focused on residential real estate across the United States. The company has a market cap of close to $10 billion and recently beat market expectations on earnings per share and revenue for the first quarter of The total homes sold on the platform in the first three months of stood at over 2,
It remains to be seen how many more startups chose the SPAC path to go public this year. The technology sector, which has a natural aversion towards traditional finance, seems to be favoring this method more than other industries. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P ETFs by more than percentage points since March Between March and February 26th our monthly newsletter’s stock picks returned %, vs. % for the SPY. Our stock picks outperformed the market by more than percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Image by Sergei Tokmakov www.thecorporateattorneys.com from Pixabay
With this context in mind, here is our list of the 10 best SPACs to invest in according to Reddit. These companies were ranked keeping in mind the hype around them on Reddit, the funds they raised at their initial public offering, and the mergers they are presently involved in.
Best SPACs to Invest In According to Reddit
InterPrivate II Acquisition Corp. (NYSE: IPVA)
InterPrivate II Acquisition Corp. (NYSE: IPVA) is a special purpose acquisition company that is run from New York. It is placed tenth on our list of 10 best SPACs to invest in according to Reddit. The firm went public in March , managing to raise close to $ million from the initial offering. It focuses on mergers with companies working in the auto, consumer, retail, and industrial technology businesses. The CEO of the firm is Ahmed Fattouh.
InterPrivate II Acquisition Corp. (NYSE: IPVA) has a market capitalization of over $ million. The week price range of the stock is between $ and $ On June 1, the firm received a notice from the New York Stock Exchange after it failed to file a quarterly report for the first three months of with regulatory authorities in the United States. The notice does not immediately affect the status of the company on the exchange.
Just like DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN), InterPrivate II Acquisition Corp. (NYSE: IPVA) is one of the best SPAC-linked stocks to invest in according to Reddit.
9. FirstMark Horizon Acquisition Corp. (NYSE: FMAC)
FirstMark Horizon Acquisition Corp. (NYSE: FMAC) is a special purpose acquisition company based in New York. It is ranked ninth on our list of 10 best SPACs to invest in according to Reddit. The company went public in October , raising over $ million from the initial offering. The firm mainly concentrates on mergers with technology companies that are based in the United States or Canada.
FirstMark Horizon Acquisition Corp. (NYSE: FMAC) has a market capitalization of over $ million. The CEO of the firm is Amish Jani. The week price range of the company’s shares is between $ and $ The company is different from other SPACs as it has permission to pursue transactions with other companies that are affiliated with people who are sponsors or sitting on the board of directors of the firm.
Just like DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN), FirstMark Horizon Acquisition Corp. (NYSE: FMAC) is one of the best SPAC-linked stocks to invest in according to Reddit.
8. Tuscan Holdings Corp. (NASDAQ: THCB)
Tuscan Holdings Corp. (NASDAQ: THCB) is a special purpose acquisition company headquartered in New York. It is ranked eighth on our list of 10 best SPACs to invest in according to Reddit. The company concentrates on initial public offerings related to the technology sector. It went public in March and raised more than $ million from the offering. The CEO of the company is Stephen Vogel.
Tuscan Holdings Corp. (NASDAQ: THCB) has signed a definitive agreement for a merger with Microvast Inc., the Texas-based company that designs battery control systems and is valued at over $3 billion. The battery firm is in talks for an initial public offering in the coming months. Tucson has a market capitalization of over $ million.
Just like DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN), Tuscan Holdings Corp. (NASDAQ: THCB) is one of the best SPAC-linked stocks to invest in according to Reddit.
7. Fusion Acquisition Corp. (NYSE: FUSE)
Fusion Acquisition Corp. (NYSE: FUSE) is a special purpose acquisition company run from New York. It is ranked seventh on our list of 10 best SPACs to invest in according to Reddit. The firm targets mergers with other companies in the technology, financial services, and wealth management sectors. It went public in June and raised more than $ million from the offering. The CEO of the firm is John James.
Fusion Acquisition Corp. (NYSE: FUSE) has signed a definitive agreement for a merger with MoneyLion, the New York-based mobile banking company that is valued at close to $3 billion. MoneyLion is planning an IPO for the second half of According to news agency Reuters, the merger will be supported by $ million in private investment from firms such as BlackRock, Apollo Global Management and others.
Just like DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN), Fusion Acquisition Corp. (NYSE: FUSE) is one of the best SPAC-linked stocks to invest in according to Reddit.
6. Fortress Value Acquisition Corp. II (NYSE: FAII)
Fortress Value Acquisition Corp. II (NYSE: FAII) is a special purpose acquisition company based in New York. It is placed sixth on our list of 10 best SPACs to invest in according to Reddit. The company went public in August and raised more than $ million from the offering. It targets mergers with firms working in the technology sector. It presently has a market capitalization of close to $ million. The CEO of the company is Andrew McKnight.
Fortress Value Acquisition Corp. II (NYSE: FAII) completed a merger and IPO with ATI Physical Therapy, Inc. (NYSE: ATIP), the Illinois-based physical therapy firm founded in that is valued at close to $ billion. ATI is the largest outpatient physical therapy provider in the United States. The company runs close to physical therapy clinics in the country. Morgan Stanley and Deutsche Bank were underwriters on the ATI merger with Fortress.
Just like DraftKings Inc. (NASDAQ: DKNG), ChargePoint Holdings, Inc. (NYSE: CHPT), Virgin Galactic Holdings, Inc. (NYSE: SPCE), Nikola Corporation (NASDAQ: NKLA), and Opendoor Technologies Inc. (NASDAQ: OPEN), Fortress Value Acquisition Corp. II (NYSE: FAII) is one of the best SPAC-linked stocks to invest in according to Reddit.
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Disclose. None. 10 Best SPACs to Invest In According to Reddit is originally published on Insider Monkey.
How Redditors Beat Hedge Funds at Their Own Game(Stop)
Game on. Photo: Michael M. Santiago/Getty Images
GameStop is a publicly traded company, best known for selling video-game discs and cartridges in shopping malls.
This is a poor niche for a profit-seeking entity in It has never been easier to download some new lark onto your gaming console from the comfort of home. And it has never been less wise to make an unnecessary visit to a shopping mall.
Until recently, the price of GameStop shares reflected these realities. Whereas in , one had to pony up $ for a piece of GME (its ticker name), that figure had fallen to $ by New Year’s Eve And although the firm had made a big fuss about how it was pivoting to ecommerce and would soon rise like a phoenix from the ashes (and/or shuttered strip mall), conventional wisdom on Wall Street held that its stock had nowhere to go but down.
But the value of a company can’t be reduced to its expected future earnings. One must also consider a wide range of other factors. Among them: How much nostalgia does the firm inspire in users of the Reddit forum r/wallstreetbets? And would a rally in GameStop shares be funny? Which is to say, has the firm crossed the “so bad it’s good” threshold, as inadvertent comedic masterpieces like The Room or Troll 2 had done before it?
America’s top hedge funds failed to ask these questions. Fortunately, the collective wisdom of rational market participants ensured that they were eventually incorporated into GME’s stock price. And, as of 3 p.m. Wednesday afternoon, a share in the GameStop corporation attained its true, objective value of $
All right. Enough snark. You didn’t come here for mirth. You came for an explanation of how the stock market works again, because now that a stake in GameStop is worth more than one in Goldman Sachs — and a herd of Redditors have wrecked major hedge funds, while threatening to trigger a full-blown market correction in the process — you’re no longer sure you get this “late capitalism” thing.
Say you’re a hedge fund that has determined, through expert analysis, that the future of video-game retail is even bleaker than its present. One way to make money off that insight would be to borrow shares of GameStop, sell them for cash, wait for the price of such shares to inevitably fall, then buy them back at a lower rate and return the repurchased shares to your lender. This is called “shorting a stock.” And it can be a risky maneuver. To borrow shares, you need to put up collateral, and be prepared to return such shares whenever your lender asks to have them back. If the shares you borrowed start climbing in value, then you’ll have to find more collateral to satiate your lender while waiting for the market to finally recognize the truth of your analysis. If you run out of collateral, or your lender runs out of patience, you’ll need to buy back those shares at a loss.
And when you do so, you’ll make life a bit harder for all of the other traders who made the same bet that you did. This is especially true if you are a multibillion-dollar hedge fund that has amassed a large short position in a given stock: After all, the moment you buy back a large number of shares in a given company, you increase market demand for such shares, and thus put upward pressure on their price. That can push the share price past some other hedge fund’s threshold for cutting bait, leading to still more market demand for the once-derided shares, which proceed to surge in value. This is called a “short squeeze.”
Now, say you are a bored Reddit user with a fondness for gambling, resentment of Wall Street, and a small amount of spare capital. One way to amuse yourself — and potentially make money — would be to (1) gather with thousands of other similarly inclined people in an internet forum, (2) identify stocks that are being heavily shorted, and then (3) collectively buy up a bunch of shares in those stocks, so as to orchestrate a short squeeze.
Better yet: To get more bang for your investment buck, you could buy call options for your desired stock. A call option is a contract that entitles its owner to buy a given stock at a specified price within a specified time period. And it’s a great financial product for investors whose appetite for risk outstrips their cash on hand. To see why this is, consider the following from Matt Levine:
[L]ast Tuesday (Jan. 19), you could have bought a $strike call option on shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $ per share, or about $ for a share option contract; the stock closed that day at $ If you sold the options on Friday (Jan. 22), when the stock closed at $, they were worth $ per share. You put in $ and got back $1,; you made a % return in four days. If you had just bought shares of stock instead, you would have had to put in $3, to get back $6,, a 65% return.
Now, say you’re a market-maker who is fielding a ton of bullish GameStop call options. Your goal is not to take the other side of these bets — you just want to neutrally facilitate everyone’s trades. Thus, to hedge against the risk that GameStop shares will rise to the bizarrely high “strike” prices people keep asking for, you need to buy up a certain number of GameStop shares yourself. If, in the ensuing days, a short squeeze is triggered — and the value of GameStop shares rises beyond all-expectation — you will need to buy more of your own shares to keep your books neutral. In doing so, you will put upward pressure on the price of the stock, which could force more shorts to buy, thereby increasing the price of the stock, leading you to buy more shares to keep your books neutral, in a cycle that’s vicious for hedge-fund shorts — and glorious for Reddit longs.
This mechanical process is what made it possible for a crowd of small-dollar retail investors on social media to propel price movements large enough to exhaust the risk appetite (and/or collateral) of a multibillion dollar hedge fund. As Bloomberg reports:
The first sign of trouble for hedge fund wunderkind Gabe Plotkin came in late October: A poster on Reddit’s popular wallstreetbets forum was taking aim at his wildly successful investment firm.
“GME Squeeze and the demise of Melvin Capital,” wrote the user, Stonksflyingup, referring to stock ticker of GameStop Corp. and Plotkin’s $ billion firm. Before long, veryforestgreen weighed in: “Melvin Capital New Short Attack.” Then, greekgod “Melvin vs WSB! And GME to the moon.”
… The attack on Plotkin’s six-year-old Melvin Capital shifted the balance of power in ways that would have seemed unimaginable only months ago. By Wednesday, the firm had capitulated to the amateurs and covered the GameStop short … So steep were the losses — about 30% through last week — that Melvin on Monday turned to billionaire hedge fund founders Ken Griffin and Steve Cohen — Plotkin’s former boss — to shore up the firm.
The GameStop mania will eventually run its course; there are many early investors sitting on massive gains, and their incentive to exit will eventually overwhelm their irrational exuberance, thereby triggering a sell-off.
But investor interest has already migrated to other heavily shorted stocks with strong nostalgia value: Shares in Tootsie Roll Industries soared 53 percent Wednesday morning, while a stake in AMC Entertainment Holdings has quintupled in value over the past week.
Manias have been around for as long as financial markets have. And retail investors have been hyping stocks in chat rooms — then making their collective presence felt in markets — since the dot-com boom.
But three ingredients of the present madness are novel: (1) Fee-less online trading platforms that enable retail traders to buy and sell call options with a few flicks of their thumbs, (2) social-media algorithms that identify highly engaging financial-market stories, and then direct users to those stories, and (3) a world-historic pandemic that briefly made sports betting impossible last spring, causing a large population of gambling addicts to develop day-trading habits.
The pandemic won’t be with us forever. But absent new regulations, those first two factors will be durable sources of volatility that investors will need to account for when structuring their portfolios.
As Dave Nadig of ETF Trends writes:
[S]ocial media — which includes the curation algorithms of TikTok, Reddit, Robinhood, Amazon, Netflix, etc. — is designed not to do anything good for you (the consumer) but to keep you engaged on the platform you happened to launch from your phone. Nearly by definition, this leads you down a funnel into which it is very difficult to return. Once your TikTok feed is full of stock tips, it’s nearly impossible to get rid of them. Once you start following /r/WallStreetBets, you’re going to get the most sensational, clickbait posts bubbled to the top of your window: Go deep, Go narrow, Stay engaged. And do it in a market designed to take those few seconds of attention and execute on them.
… That’s what’s new here. It’s not that this generation of daytraders has invented daytrading or learned how to use options for the first time or even swarmed a “story stock” (now we call them “meme stocks” I guess). What’s new is that an entire generation of investors is locked at home with little to do and a set of services on their phone designed to funnel them into the most extreme, most dopamine-driving financial ideas.
And once those investors are herding around a given “meme stock,” bloggers will start drafting explainers on the subject to net their employers’ a share of the topic’s search and social traffic, marginally increasing the hype around that stock in the process.
Former White House press secretary Anthony Scaramucci thinks so. And there is certainly a populist verve to Redditors getting rich at the expense of large investors, while making a mockery of the notion that private financial markets rationally allocate capital. What’s more, at least some of the GameStop longs appear to have political motivations (of a sort).
This said, it is far from clear how progressive the ultimate redistribution of wealth from the GameStop craze will be. Eventually, this stock will come crashing down to Earth, and when it does, it will make many ordinary people who got caught up in the mania significantly poorer. When psychologically fragile people suddenly lose large sums of money — or what they believe to be large sums of money — they sometimes kill themselves. And nine months into the COVID pandemic, there are quite a lot of psychologically vulnerable people spending too much time on Reddit.
Another less-than-populist aspect of this drama is that the hedge fund that’s been hardest hit — Melvin Capital — did not become the favored target of WallStreetBets on account of its unique avarice or unscrupulousness, but rather, its exceptional transparency:
Why they singled out Melvin remains a mystery. As far as hedge fund managers go, Plotkin is considered low key. He doesn’t show up at many conferences or hobnob at society balls. Former colleagues and current investors say he’s a nice, quiet guy — not the type to make enemies.
The most obvious explanation is that his positions were in some sense knowable. Hedge funds generally go to great lengths to guard their short positions. If they use put options, for example, they buy them over the counter, which means they don’t have to list them in regulatory filings. Plotkin’s filing in the third quarter showed put options on 17 companies, many of them highly shorted names.
Thus, for Wall Street, the upshot of all this is going to be: Never let regulators or the public know what your short positions are. Which doesn’t seem like a huge win for “the 99 percent.”
Finally, GameStop mania is putting downward pressure on the entire stock market right now: As hedge funds see their shorts backfire en masse, they’ve started selling off shares of companies with strong fundamentals, just to cover their losses, a move that drags down the value of the market as a whole, and with it, many ordinary Americans’ (k)s and trade unions’ pension funds.
To this point, the S&P’s downward dip has been tiny. And on the list of America’s problems, “equity values aren’t high enough” ranks low. So, the GameStop rally isn’t an especially lamentable phenomenon. But it isn’t the storming of the Bastille either. We aren’t witnessing a popular uprising against the tyranny of finance capital. We’re just trying to mine a little more dopamine from pixels while the Earth slowly dies.
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‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game
GameStop shares have soared 1, percent as millions of small investors, egged on by social media, employ a classic Wall Street tactic to put the squeeze — on Wall Street.
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A real estate salesman in Valparaiso, Ind. A former line cook from the Bronx. An evangelical pastor and his wife in Huntington Beach, Calif. A high school student in the Milwaukee suburbs.
They are among the millions of amateur traders collectively taking on some of Wall Street’s most sophisticated investors — and, for the moment at least, winning. Propelled by a mix of greed and boredom, gleefully determined to teach Wall Street a lesson, and turbocharged by an endless flow of get-rich-quick hype and ideas delivered via social media, these investors have piled into trades around several companies, pushing their stock prices to stratospheric levels.
Some of the names are from an earlier business era. BlackBerry’s shares are up nearly percent this year. Stock in AMC, the movie theater chain, has surged nearly percent. But the trade that captures the David-versus-Goliath nature of the moment involves GameStop, the troubled video game retailer that was once a fixture in suburban malls.
On Wall Street, individual investors are often derided as “dumb money,” destined to lose against the highly compensated analysts and traders who buy and sell stocks for a living. But in recent days, individual investors — many of them followers of a popular, juvenile, foul-mouthed Reddit page called Wall Street Bets — have upended that narrative by banding together to put the squeeze on at least two hedge funds that had bet that GameStop’s shares would fall.
While the hedge funds and other professional money managers had been shorting GameStop’s shares, betting that its stock was doomed to further decline, the retail investors — online traders, mom-and-pop investors, small brokers and others — have been pushing the other way, buying shares and stock options. That caused GameStop’s market value to increase to over $24 billion from $2 billion in a matter of days. Its shares have risen over 1, percent since December. Between Tuesday and Wednesday, the market value rose over $10 billion.
The tribal framing online, as a kind of team sport pitting plucky upstarts against well-heeled Wall Streeters, has been especially helpful in motivating more investors to participate. This week, Tesla’s chief executive, Elon Musk, fueled the trading by posting about the Reddit page on Twitter. And speculation is growing that other investors are seeing fresh opportunities to push the stock even higher.
Ben Patte, 16, a high school student in Wisconsin who said he made $ off GameStop stock, said the campaign felt like vindication for himself and fellow young traders. “It’s a good opportunity to make money and stick it to the hedge funds,” he said. “By buying GameStop, it’s kind of like beating them at their own game.”
No one knows how this ends. Some analysts say the intense activity could eventually prompt a wider sell-off in the market by forcing hedge funds on the losing side of these trades to sell parts of their portfolios to raise cash to cover their losses. While this speculative frenzy played out on the market’s sidelines, the S&P fell more than percent on Wednesday, its worst day since late October, as the Federal Reserve gave a glum assessment of the economy and before a number of big tech companies announced their earnings.
“What happens in situations of stress is that people are forced to raise funds and that often means selling your winners,” said Steve Sosnick, chief strategist at Interactive Brokers in Greenwich, Conn. “How does it end? Badly. Eventually, the bigger the balloon, the louder the pop,” said Mr. Sosnick. “When does it end? I don’t know.”
On Wednesday, the retail brokerage firm TD Ameritrade put restrictions on the trading of GameStop, AMC and other stocks, citing “unprecedented market conditions.” And market regulators could step in.
But for now, the siege is on.
The Game Starts
Beginning last summer, GameStop shares started to rise after an investment firm owned by Ryan Cohen — founder of Chewy, the online pet supplies shop, whose stock was popular with retail investors — bought a stake in the company and joined its board. Around the same time, some hedge funds were betting that GameStop’s stock would plummet. The company had been reeling from consumers’ shifts to online commerce and streaming, but the pandemic was bruising it further.
Short-selling works this way: An investor, who expects a stock price to fall, borrows shares of that company from another investor for a fee and sells it immediately, hoping that when the price does fall, they can buy the shares back cheaply, return them to the owner and pocket the difference.
It’s a risky trade. If the stock rises, the short seller is exposed to losses that are theoretically infinite. (After all, share prices can keep rising, while they can only fall to zero.) For that reason, when a bet goes wrong, short sellers rush to repurchase the shares they borrowed so that they can return them and exit their trades — a process known as covering.
That’s what is happening with GameStop. As retail investors began to buy up its shares and options — many of them egged on by Wall Street Bets and other forums — its stock began to surge, forcing the short-selling hedge funds to buy back the borrowed shares at a higher price, which itself pushed the stock price higher. In Wall Street parlance, this is a “short squeeze” — a strategy sometimes employed by sophisticated investors against one another.
Over the last three trading sessions, GameStop shares have careened wildly. On Wednesday, when the shares rose almost percent, $24 billion worth of the company’s shares changed hands, the most actively traded stock on Wall Street.
Analysts say GameStop shares have become unmoored from underlying expectations for profit that typically determine the value of a stock.
“Trading like we’re seeing in GameStop is humbling for those of us who hold onto the quaint idea that capital markets channel investors’ money to its most efficient and productive uses,” said Tyler Gellasch, a former Securities and Exchange Commission official who now leads the Healthy Markets Association, a nonprofit that promotes transparency in financial markets.
Pablo Batista is among those driving the frenzy. Since the pandemic shuttered the restaurant in Midtown Manhattan where he worked as a line cook, he has been trading stocks from his family home in the Bronx. At first, Mr. Batista, 25, traded to pass time during the lockdown, but has since become more serious as his $4, investment in stocks has swelled to more than $67, He spends most days on the messaging site Discord, trading stocks along with former friends from high school.
“At this point, I’m like overwhelmed,” he said of the $11, he made trading shares of GameStop on Monday. “It’s ridiculous. It’s crazy.”
Echoes of Day Trading’s Heyday
Almost since the internet was created, investors, traders and speculators have gathered online to swap rumors, tout their holdings and trash stocks they’re shorting. In the s, such message boards were hotbeds of bullish talk on the popular tech stocks that dominated the dot-com boom.
The current mania is reminiscent of the s, except that it’s more viral and driven by options trading. Since the pandemic hit, millions of Americans — many who are out of a job or working from home — have opened brokerage accounts and begun trading actively, helping to fuel a market rally.
Retail traders aren’t just buying and selling stocks; they are also buying options, a kind of financial instrument that gives the holder the right to buy or sell a stock. Brokerage firms have marketed options heavily to retail investors because they are more profitable.
And then there is Wall Street Bets, the wildly popular Reddit forum focused on options trading that has become a sort of public hive mind where retail investors loosely coordinate their collective buying power on targets that are most likely to amplify price pops. In recent weeks, posts began to appear on the forum spotlighting the large amount of GameStop shares held short, and explicitly urging others to buy shares and options to move the price higher.
“Rally the troops, my brothers, for the war could be over very soon,” a commenter who goes by Gardeeon wrote on Jan. “You control the power, GME is not going to the moon, but to the edge of the [expletive] observable universe.”
Such outright calls on social media for investors to coordinate their behavior struck many observers as skirting the line of market manipulation. On Wednesday, the S.E.C. said in a statement it was “actively monitoring the ongoing market volatility.”
Lawyers say platforms like Wall Street Bets are incredibly difficult to police, and it is not clear that there have been any violations of securities law.
“If it’s simply garnering enthusiasm for people to go out and push the price up, I mean on its face, without something more, I don’t think that’s illegal,” said Andrew Calamari, a securities lawyer at Finn, Dixon & Herling, and the former director of the New York office of the S.E.C.
It is, however, effective.
Melvin Capital, a well-respected hedge fund run by Gabe Plotkin, a former top trader for the hedge fund giant Steven A. Cohen, drew the ire of Wall Street Bets after disclosing in filings that it owned puts on GameStop. (Puts are options that produce a profit if the shares of the stock fall.)
The fund’s bets backfired — The Wall Street Journal reported that it was down 30 percent in the first few weeks of January alone — and Melvin said on Monday that two bigger funds, Citadel and Mr. Cohen’s Point 72, had swooped in to inject a combined $ billion into the fund. A spokesman for Melvin said the fund had closed out its position on GameStop.
Citron Capital, a short seller that had made public statements suggesting that GameStop shares would fall, was also bruised. On Wednesday, Andrew Left, who runs the firm, acknowledged in an online video that he had covered the majority of his short position “at a loss, percent.”
Justin Speak, 27, an evangelical pastor in California, and his wife, who recently left her job to raise their children, have made $1, off GameStop in the past week. Mr. Speak said that so far they had mainly put the money toward a new bed. He described a sense of frustration at how well those in the financial sector have done since the financial crisis of
“There’s a catharsis to actually making money off their pain a little bit,” he said of his modest earnings from GameStop. His wife put it more bluntly: “Eat the rich.”
Nathaniel Popper, Gillian Friedman and Tara Siegel Bernard contributed reporting.
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Robinhood has added new limits to its app to restrict users from buying or trading any of the popular Reddit r/WallStreetBets stocks, including GameStop ($GME), AMC ($AMC), BlackBerry ($BB), Bed Bath & Beyond ($BBBY), Nokia ($NOK), and more. Users will still be allowed to close out existing positions but won’t be able to buy more of the stocks. The company is citing “recent volatility” in the market as the reasoning behind the change.
We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities.
The development is the latest in an ongoing saga that has seen a group of Reddit users from the WallStreetBets subreddit band together in an effort to drive up the stock prices of companies like GameStop and BlackBerry, in defiance of traditional hedge funds that had shorted those firms. Robinhood — a popular stock market application that allows amateur day traders to purchase those stocks without fees — has been a key tool in the Reddit group’s ability to push prices up.
Robinhood isn’t the only major company to stop accepting new trades for GameStop and AMC — more traditional brokerages like Charles Schwab and TD Ameritrade also restricted trading around GameStop and AMC on Wednesday, citing unprecedented trading activity.
The move has infuriated members of the WallStreetBets subreddit. A top post on the subreddit this morning calls the decision “market manipulation,” with angry comments calling for users to “dump robinhood for good” and lamenting the ensuring fall in stock prices that shortly followed the announcement. The group’s official moderator account has also protested the decision by Robinhood, highlighting the unfairness of the fact that day traders cannot make new investments in the stocks when traditional firms still can.
The move by Robinhood has already attracted the attention of lawmakers, with Rep. Rashida Tlaib (D-MI) posting on Twitter that the decision was “beyond absurd,” and calling for a hearing by The House Committee on Financial Services on “Robinhood’s market manipulation.”
A sticked post on the thread from moderators also implores users “No witch hunts on Robinhood please.” It’s a reflection on the recent turmoil that has hit the /r/WallStreetBets community as part of its nearly overnight success, which has seen the group’s Discord server banned for “hateful and discriminatory content” and the subreddit itself temporarily made private as the group struggles to moderate the massive influx of new users.
Update January 28th, am: Added tweet from Rep. Rashida Tlaib (D-MI) on Robinhood’s block of purchases.