Just when you thought surging financial markets couldn’t get any harder to fathom they produce GameStop, a US video game retailer whose share price jumped more than 1,900% year-to-date at one point last week.
The big news wasn’t so much the rally but its cause: an army of retail traders who had deliberately run up the stock in an effort to squeeze out short sellers.
Short selling involves borrowing a share from a broker, then selling it immediately in the hope that the share price plunges so you can buy it back at a cheaper price before returning it to the broker for what you originally paid. The difference is pocketed by the short seller.
It’s a favourite strategy of hedge funds.
That’s exactly what happened to GameStop, a legacy bricks-and-mortar retailer with dim prospects. Only this time a Reddit user caught wind that a big hedge fund had shorted GameStop and persuaded members of the r/WallStreetBets chat forum to deliberately buy the stock. That caused a so-called short squeeze, whereby short sellers were deliberately forced out of their positions by an army of retail traders who drove up the share price in the opposite direction.
The result was significant financial loss for the short sellers.
When it transpired that this is what had driven up GameStop’s share price, the mainstream media and Wall Street establishment erupted in criticism against the retail traders they said were treating the stock market like a casino.
The Securities and Exchange Commission (SEC) stepped in to say it was monitoring the situation, while online messaging platform Discord promptly banned the r/WallStreetBets Reddit forum.
But what most mainstream commentators don’t realise is that this isn’t just careless money chasing quick gains. It’s a deliberate financial subversion. Bloomberg columnist John Authers quotes a disenchanted Redditor as saying: “This isn’t a casino. This is a riot.”
That army of online day traders are deliberately mounting a co-ordinated assault on the financial establishment. One of the high priests of the movement is Dave Portnoy, founder of Barstool Sports, a US sports blog. Portnoy, who made millions when he sold a majority stake in Barstool Sports, holds huge sway over a legion of Barstool Sports loyalists known as Stoolies.
When Covid-19 first took hold in the US in early 2020, Portnoy turned to day trading and began livestreaming his activities to his millions of social media followers. He even founded an investment firm he called DDTG: Davey Day Trader Global. When the Federal Reserve embarked on unprecedented monetary stimulus to shore up the pandemic-hit US economy, Portnoy coined a simple phrase to explain DDTG’s investment thesis: “Stocks only go up.”
Placing huge bets on stocks he knew nothing about, Portnoy was lampooned by the mainstream media. His response was to prove them wrong by picking scrabble letters out of a bag to guide his stock picks. If the letters RTX emerged from the scrabble bag Portnoy would buy equities with the corresponding stock code. He also livestreamed the entire spectacle, much to the horror of the Wall Street establishment.
But his Stoolies — and those like them — saw his antics as both hilarious and a way to make a quick buck at the expense of the Wall Street establishment. In the wake of Covid-19, that army of retail trading bros has morphed into a movement of outright financial anarchists.
Think of them as the younger siblings of the Occupy Wall Street movement who have realised that the best way to get back at the establishment is to upend the very system that produced them.
Even after Discord shutdown the r/WallStreetBets Reddit forum, the retail bros resurfaced on another platform and quickly began plotting their next short squeeze — the silver bullion market, which they claim is rigged. The next day silver prices rallied.
As one r/WallStreetBets antagonist put it: “Why not squeeze $SLV [silver] to its real physical price. Think about the Gainz [sic]. If you don’t care about the gains, think about the banks like JPMorgan you’d be destroying along the way.”
The financial high drama not only shows the power of social media, it also puts regulators on the spot to draw the line between online discussions about company prospects and market manipulation.
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