For most Americans, GameStop is a struggling bricks-and-mortar video game retailer. For investors, the company has become the epicentre of a war between hedge fund pros and so-called “Reddit bros”.
Their concerted buying has pushed the stock up 1,700 per cent since the start of the year, forcing short seller Melvin Capital to seek a cash injection from allies.
It would be tempting for market professional to dismiss the Reddit bros as “dumb money” and their frenzied buying as a Ponzi scheme. Instead, this is a cautionary tale of how social media can be co-opted to attack the financial establishment. Reddit may be changing Wall Street in the way Twitter and Facebook have changed politics.
The server of the r/WallStreetBets message board used by many of the retail investors has meanwhile been banned by the chat app Discord for “hate speech” and “glorifying violence” according to a statement published by The Verge tech website.
GameStop has long been a target for short sellers. Short interest in the shares exceeded the entire float. Amateur stock jocks armed with free-trading apps piled in, egging each other on via Reddit’s WallStreetBets message board. This was retail investment for flash mobs.
The resultant short squeeze was magnified by short sellers scrambling to cover their exposure via call options, setting up punishing feedback loops. Short sellers have lost $5bn on GameStop this year, according to S3 Partners. Melvin and Citron Research, both closed out their positions this week.
Emboldened, retail investors are taking aim at other heavily shorted stocks, including cinema operator AMC and BlackBerry. The trend rippled across the Atlantic to lift heavily shorted UK stocks such as Pearson. Algorithmic traders must now be reprogramming to scrape Reddit message boards for pointers to the next big ramp.
The Securities and Exchange Commission has to decide where the dividing line lies between legitimate online discussion of a stock’s prospects and market abuse.
Smart Reddit bros will have already sold out to the Greater Fool, as latecomers are termed. Fresh short sellers are targeting GameStop. What goes up must come down. The phenomenon will repeat as long as regulators allow it and markets are flying.
This article was changed after publication to remove a speculative reference to the US alt-right and to clarify that the server of the r/WallStreetsBets message board has reportedly been banned by the chat app Discord for “hate speech” and “glorifying violence”.