Reddit Traders #WallStreetBets. Join the Financial Revolution. Make Tons of Money with Crowd ‘Short Squeeze’ trading. Transfer of wealth from Wall Street to Main Street
What is r/WallStreetBets?
As mentioned above, the reddit forum considers itself the “4chan” of the stock market world. It boasts nearly 3 million member, who refer to themselves as “degenerates”. Since their involvement with GameStop went viral, the page seems to have been made private, with some publications reporting that the moderators now feel overwhelmed. This looks to have changed, with the page now being back up and running.
Ties to GameStop
As The Verge reports, about a year ago a user called delaneydi on r/WallStreetBets argued that GameStop was underpriced by the market. The reddit thread soon conjured the idea that it would take over GameSTop as a joke, but eventually things turned serious, with users seeking to punish short-sellers and have the little guys pummel Wall Street.
Fast track to today, and GameStop’s stock has soared upward by 69 per cent, before triggering a circuit breaker halt on January 22nd. Reports then suggest that on Monday, January 25th, GameStop trading was halted nine times. Even if you don’t follow stocks closely, it’s clear that this is both remarkable and incredibly volatile.
If you’re wondering how GameStop – a company founded a year before Blockbuster that has since seen its business suffer considerably due to online marketplaces – came to be involved with r/WallStreetBets, here’s what happened: the army of online traders on the Reddit forum helped drive a meteoric rise in GameStop’s stock price in recent days.
What is short selling?
Short selling is a way to make money on a company failing, going bankrupt or seeing its stock prices go down dramatically. It involves borrowing shares for a fee and then selling them for a high price, before buying them back again at a lower price to return them. Should a company go bankrupt, you won’t have to return the stock, making short selling an effective way to make a lot of money.
That said, if stock increases and keeps going up, then you can potentially lose a significant amount of money. Other things that can arise from the practice are an increase in fees or the original investor wanting their stock back, meaning some shorts will be forced to “cover” or buy the stock back at a high price, sending the price even higher.
What is a short squeeze?
As Colas told Vox, “The short squeeze is when somebody says, ‘Oh, I know a lot of guys are short. I’m going to go long and make them buy the stock back even higher.”
When the price of the stock being shorted starts to climb, traders betting that it will fall are then forced to buy it in order to stem their losses. This, in turn, leads the price of the stock to climb even higher and in the absolute worst scenario, losses can be unlimited.
The plot thickens
Redditors on r/WallStreetBets figured that if they all worked together, they could essentially screw the shorts over and make a profit doing it. The plot arose four months ago, with the subject line: “Bankrupting Institutional Investors for Dummies, ft Gamestop.”
While there are a number of hedge funds and investors (consider them the Goliath of this story) that are shorting GameStop, at the centre of the saga is Citron Research, run by famed short seller Andrew Left. When Citron announced on Twitter last week that it would run a livestream event laying out the short case against GameStop and why people shouldn’t be buying its stock, it predicted shares would go back to $20. The event was put off, but eventually uploaded to the Internet as a video. It incited a war with reddit users, with Left going so far as to say he’d no longer comment on GameStop because of the “angry mob” that’s formed against him, adding that he’d “never seen such an exchange of ideas of people so angry about someone joining the other side of the trade.”
Since then, retail traders have been able to orchestrate a short squeeze against Citron and the others betting against GameStop, leading to the volatility we’re seeing in the as the stock price continues to be driven upwards.
Why is this a big deal?
It sounds trivial: a group of people on Reddit hacking the Wall Street game and beating investors at it. But the consequences are actually monumental. Already, some companies have already found themselves at the mercy of r/WallStreetBets. Melvin Capital Management, a hedge fund betting against GameStop was down 15 per cent in the first three weeks of 2021, according to Wall Street Journal. Now, it’s not only had to call in some help, but even closed out its position altogether.
A lot of this doesn’t make much business sense at all, but it’s clear that the trade went viral, and as a result, GameStop stock took off.
What do the stock experts have to say about all this?
No doubt if Malcolm Gladwell were reading the news this morning, he’d have been chuckling into his coffee, knowing this to be a fitting chapter in his book, David v Goliath. The saga really is just that, as the reddit users have caused a major headache for short sellers betting against GameStop and banking on its stock falling.
Already, investor and CNBC personality Jim Cramer has called the GameStop drama the “squeeze of a lifetime,” while Bloomberg opinion columnist Matt Levine said that one possible explanation for what happened could be “utter nihilism” on the part of the Reddit crowd, a story “perhaps best told with a series of rocket emojis.” In an interview with Wired, one of the WallStreetBets moderators simply stated: “It was a meme stock that really blew up.”
As Vox suggests, “There has been a lot of hand-wringing about the day-trading trend and this new crop of investors playing the markets, many of whom are treating stocks more like a spin at the roulette wheel than a long-term strategy to build wealth. It’s not clear how many of them are looking at the underlying fundamentals of companies, or whether they’re just “YOLO-ing”themselves across the market.”
As Nick Colas, co-founder of DataTrek Research, told the publication: “It’s dramatic, and you don’t see this magnitude very often, but when it happens, it’s spectacular.”
Discord bans r/WallStreetBets
After the Internet was flooded with articles concerning the subreddit, the page appeared to have been made private. Now though, Discord has banned the server. While you’d have expected such an action to have been made on the grounds of financial fraud, this wasn’t the driving force behind the decision. Rather, as Discord explained to The Verge, the subreddit was banned because it continued to allow “hateful and discriminatory content after repeated warnings.”
In a statement, Discord said: “The server has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin. Today, we decided to remove the server and its owner from Discord for continuing to allow hateful and discriminatory content after repeated warnings.”
The statement continued: “To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks. Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors. We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.”