Reddit's War on Wall Street: Stock Market Upheaval in the US, Support for GameStop and Criticism of Robinhood

Investors have lost tens of billions of dollars. Elon Musk supported them, and politicians laughed at Wall Street.

Last week, shares of GameStop, the international video game retail chain, soared more than 500%. Reddit users joined forces to save the beloved brand that professional traders on Wall Street had been "shorting".

How can the power of social media wipe out tens of billions of dollars from major investors in a single week? What do Nokia, BlackBerry, AMC and Elon Musk have to do with it? What is a "short"? TK Media breaks down the main business event of the week.

It all started out of boredom and for fun

The backdrop to the turmoil on the US stock market was the pandemic, which boosted interest in online stock trading during lockdowns. Amateur investors on the r/WallStreetBets forum were already discussing the market's undervaluation of GameStop at the beginning of 2020.

The company was going through hard times: its shares fell from $55 in 2013 to $4 in 2020. Several large hedge funds on Wall Street kept opening short positions worth billions of dollars to profit from the fall in GameStop's shares, which outraged the brand's fans on Reddit.

In January 2021, users of r/WallStreetBets, with an audience of over 4 million, began buying up GameStop shares en masse. On January 12 they were still worth less than $20; two weeks later they peaked at $347, and at the time of publication they were trading at around $325.

The war waged by Reddit users against professional traders on Wall Street led the latter to massively close their shorts and buy back shares in order to minimize losses from their failed bet on a decline.

Losses keep growing

Feeling their strength, retail investors from r/WallStreetBets decided to punish investment funds even harder. They bought up shares of other companies with many open short positions: Nokia, BlackBerry and AMC.

The latter's shares rose from $4.96 (January 26) to $19.90 (January 27) and at the time of publication were trading at around $13.26. This was the biggest one-day jump in history.

Holders of short positions lost tens of billions of dollars. According to WSJ, on January 27 alone losses on GameStop shares amounted to $14.3 billion. Hedge fund Melvin Capital Management lost $3.75 billion, almost 30% of its value, and was forced to raise $2.75 billion to stabilize its position.

Reddit users celebrated their victory. The leader of the war, 34-year-old financial adviser Keith Gill, who had hidden under the nickname Roaring Kitty until he was exposed, earned $16 million from the rise in GameStop shares, starting from $56 thousand, a profit of more than 28 500%.

The intervention of the wrong Robin Hood

On January 28, the online brokerage Robinhood, which had become the main tool of r/WallStreetBets, banned purchases of GameStop, Nokia, BlackBerry and AMC shares. The decision was explained by their high volatility and rising risks for investors.

Other services followed suit, restricting trading in the listed stocks, causing their prices to plunge rapidly. Reddit users furiously accused Robinhood of pandering to the interests of big players on Wall Street.

Robinhood's rating in the App Store and Google Play plummeted to one star and was flooded with negative reviews within hours. Soon the service faced a class action lawsuit for "depriving retail investors of potential profits and manipulating the market."

Notably, Robinhood had positioned itself as a "democratic platform for everyone." In 2016 the service called for allowing everyone who wanted to trade to do so, and also abolished brokerage commissions.

US authorities laughed at Wall Street

Robinhood's actions were criticized by members of the US Congress from both the Democratic and Republican parties. Congresswoman Alexandria Ocasio-Cortez said that people on Wall Street had long treated the US economy like a casino, and now were complaining about a forum whose users behave the same way.

Ocasio-Cortez soon proposed holding a hearing on Robinhood and urged the US Securities and Exchange Commission (SEC) to launch an investigation.

Republican Senator from Texas Ted Cruz supported his colleague's statement.

Senator Elizabeth Warren accused the SEC of having "allowed the stock market to turn into a casino" due to the lack of proper rules. Nasdaq CEO Adena Friedman also called for getting to the bottom of what was happening.

However, the SEC, the White House and the US Treasury Department limited themselves to brief statements saying they were closely monitoring the situation on the stock market.

Experts from WSJ noted that what was happening showed signs of a "financial bubble," but did not violate laws and was not subject to regulatory intervention. The publication called it "more a mob craze than market manipulation."

What kind of flash mob would it be without Elon Musk

Tesla and SpaceX founder and CEO Elon Musk closely followed the situation. Sometimes his remarks were tongue-in-cheek, and sometimes quite serious.

First, the entrepreneur posted the phrase "GameStonk" on Twitter with a link to r/WalStreetBets. The Stonks meme is about dubious investments. Elon combined the joke with GameStop and raised the company's share price by 130%.

Later Musk supported Ocasio-Cortez's statement and also criticized the group chat service Discord, which had banned the WallStreetBets group on its platform. Later the service allowed users to create a new group and began helping it with moderation.

The entrepreneur expressed contempt for "shorters" and called the idea of short selling a fraud.

Elon Musk
entrepreneur, founder and CEO of Tesla and SpaceX

You can't sell houses you don't own, you can't sell cars you don't own, but you can sell shares you don't own?! This is a scam, legal only for archaic reasons.

The well-known investor Michael Burry, the character played by Christian Bale in the film "The Big Short," also reacted to the situation. He predicted the fall of the real estate market and earned $700 million on the 2008 financial crisis.

By November 2020 he owned 1.7 million GameStop shares worth $17 million, and on the January events he earned more than 1,500%, or about $270 million. However, Burry called what was happening "unnatural, insane and dangerous," noting the need for regulatory intervention. Later he deleted the tweet.

Losses and the prospects of the war

On January 29, Robinhood allowed "limited" purchases of GameStop, Nokia, BlackBerry and AMC shares. Share prices resumed their rise. Another victory for Reddit!

r/WallStreetBets users brag about profits of thousands of percent, but until positions are closed this is a "paper" result. All holders of GameStop shares and options cannot sell them at the peak at the same time and lock in profits, because that would lead to a drop in price.

The community is waiting for the reaction of lawyers and regulators, because such an internet phenomenon could change the stock market forever. For now, simple Reddit users are calling the shots.