Gamestop is a dying brick and mortar video game retailer that hasn’t reported a profit since January 2020. Over the course of a week, its stock, once valued as low as $2.57 per share, rose to an all-time high of $500 on January 28. A group of investors, both retail and institutional, identified that institutional investors shorted 114% of the shares available to be traded. When a stock’s price rises, investors with short positions buy more shares to mitigate potential losses, sending the price even further. Buying relatively inexpensive call options had a similar effect, as those selling the options bought stock to hedge against potential losses. Since Gamestop had relatively few shares outstanding, buying and holding the stock created artificial scarcity, sending the price higher yet. This practice, known as a short-squeeze, proved highly effective, with share price remaining inflated until this past Monday’s sell-off.
A short-squeeze is not unprecedented. In 2008, Volkswagen briefly became the world’s most valuable company, when Porsche increased its stake in a surprise announcement and shorts rushed to cover their losses. The mechanics of Gamestop’s sudden peak may even be similar, as some experts believed Wall Street power players fueled the surge. However, while the ultimate responsibility for the surge certainly matters, the narrative it fueled may have more lasting importance. Unlike previous attempts to hijack the stock market by leveraging its mechanics, the predominant explanation was the coordinated attempts of millions of retail investors. Their office was r/wallstreetbets (WSB), a subreddit self-described as if “4chan found a Bloomberg terminal.” Their culture mimics standard-issue internet edginess and their prevailing inclination is to treat the stock market as one giant casino. The leader of the Gamestop push was a user named DeepFuckingValue, who noticed the aforementioned technicals that enabled the short surge. As the stock exploded in value and into the news, the subreddit did the same, gaining about six million new members during the month of January. For reference, the subreddit previously had just under two million.
As the surge continued, costing hedge funds billions, a David vs. Goliath narrative began to form. On one side are the retail investors – ordinary individuals who believed that Gamestop deserved a chance and who hated Wall Street’s attempts to crush it with their short positions. On the other end are the hedge funds who aimed to profit off the downfall of iconic American brands. It’s no coincidence that other stocks pushed include Blackberry, Nokia, and AMC. As retail investors began to notice the significance of this moment, the community’s mood shifted. They began to actively promote the idea of punishing those they perceived as responsible for the 2008 financial crisis. Terminology the retail investors used when discussing the stock transformed from irreverent humor to battle cries encouraging the subreddit to buy and hold. In short, they were at war.
In the case of Gamestop, the question of winners and losers belies the true significance of the story. The reaction to the surge was far more consequential than the surge itself. An issue of great and growing importance in this nation is the power of a small collection of elite individuals and companies to control how the country thinks and acts. The most recent use of power in politics was the banning of President Trump and thousands of pro-Trump accounts on social media platforms following the January 6 insurrection. These bans were warranted, but that reality fails to discount the insanity that a private organization has the power to deny the US president his preferred platform for communicating with voters. More significantly, the bans demonstrate that big technology leaders are willing and able to suppress beliefs they view as unacceptable. They are private companies, a status which grants them the legal right to do so. However, in a pandemic area where social media companies are the public square and Robinhood the new trading floor, that agency over the lives of millions should be challenged.
The implicit slippery slope became obvious when institutional actors seemed to run a similar playbook against WSB. As Gamestop stock reached astronomical prices and millions of new users joined WSB, Discord temporarily banned their server and their subreddit went private for hours. Robinhood and other no-fees brokerages popular with retail investors temporarily removed the option for users to buy shares of Gamestop and other “meme stocks” favored by WSB. These actions had real consequences, as the stock cratered nearly 50 percent in the aftermath of the moves. Notably, politicians with populist sympathies ranging from New York Representative Alexandria Ocasio-Cortez to Texas Senator Ted Cruz condemned the move. Meanwhile, others with more institutionalist sensibilities, like Senator Elizabeth Warren, focused their ire on the stock market being a poor reflection of economic performance and company value. Traditional gatekeepers also played their role in controlling the narrative around the stock. The SEC began a probe into “misinformation” that could have caused the squeeze. CNBC smeared WSB as an element of the Trumpian populist right. Other networks claimed, without evidence, that WSB had moved on to trying to squeeze silver, an announcement perceived by WSB as an attempt to disrupt their Gamestop effort. Comedian Jimmy Kimmel suggested that Russian “disruptors” could be accountable for the price movements.
These actions are explainable. Robinhood claimed it limited trading because they were unequipped to handle unprecedented volume of trades while conforming to SEC regulations. The Discord and Reddit issues are attributable to the technical problems of administering an existing large community that quadrupled in size. The price of silver really did rise, and retail investors potentially did play a role. The true issue at hand is the power to control the narrative. Popular movements, on both the left and right, require the ability to communicate to grow. The power to monitor and to decide what people can communicate online, particularly at a time when that communication has never been more significant, is incredible and dangerous. That potency is why this issue has unified such a diverse ideological spectrum. Notably, leftist Michigan Representative Rashida Tlaib opposed expanding national security powers in the aftermath of January 6. She targets the government but the principle remains the same – the ability to target alleged radicals has far reaching implications, both left and right. There is no obvious solution, no catch-all regulation that can curb the influence of the social oligarchy. The only answer is to be vigilant, and to notice opinions promoted and suppressed. Most importantly, it is vital to recognize that the targeting of those with unfavorable opinions can easily be redirected. Left or right, this issue will define public discourse in the 21st century. For the good of the nation, the resolution should favor the redditors, not the hedge funds.
Original illustration by Iris Xie