Redditors took on hedge funds over GameStop and AMC Theatres stock and won. So what now?

Redditors took on hedge funds over GameStop and AMC Theatres stock and won. So what now?

Sometimes heroism has a name, and sometimes — well, at least once — that name is u/ronoron. In recent weeks, users of a Reddit message board called r/WallStreetBets decided that they would like to do something they’d tried to do often in the past: mess with a big hedge fund trying to short a public company. In this case, they wanted to mess with the hedge fund attacking GameStop, the debt-mired retail chain that buys back video games from consumers and sells the used copies alongside new and used games, systems and controllers.
Related OPINION The Toys R Us bankruptcy is what happens when Wall Street puts profits before people GameStop isn’t popular with the electronics and entertainment companies that develop the games and sell the systems, which are constantly pushing users to pay a little bit more, whether it’s for nickel-and-dime extra features or subscription services or by making users download games at prices they set rather than purchasing physical discs used. To gamers — who are a large and active part of Reddit — that makes GameStop the friend of the little guy.
Recently, though, the company had turned into a whipping boy for Wall Street: In April, it was trading at $2.80 a share after the company announced in March that it would close more than 300 stores . (It upped the number to 400 to 450 in September and then said in December that it would close 1,000 more by March .)
Short sales are essentially bets that the price of a share will go down — bets that the average person can’t make.
At close on Wednesday, GameStop’s stock was worth $347.51 per share.
This is what happened in between.
In November, u/ronoron, who posts about stocks on WallStreetBets, noted that a hedge fund called Melvin Capital had shorted an enormous amount of GameStop stock (and that it had also bet big against Nintendo). Short sales are essentially bets that the price of a share will go down — bets that the average person can’t make. Short sellers borrow stocks they don’t own from brokers, who act as middlemen, and then sell them on the open market. The bet is that the price will go down, so that when they have to return the stocks to the entities from which they were borrowed by buying them back on the open market, they will pay less than they sold them for and make a profit.
Most Redditors, like the rest of us, can’t short-sell. Quite a few of them say they are using the app Robinhood (which doesn’t allow shorts) to make their trades, rather than a brokerage. Robinhood is popular, easy-to-use software — though it did raise eyebrows when it sold its “order flow” (which is direct access to the list of stocks its customers are buying and selling before those trades hit the market) to the market maker Citadel Securities, a sister firm of Chicago-based hedge fund, Citadel. Citadel Securities specializes in computerized, high-frequency trading and can use the information to make money off fast-moving trends — like the GameStop stock price explosion.
People who work in financial services are quick to say — though not everyone is quick to believe them — that short selling is not a fundamentally evil thing to do; it’s a way to take money from a supposedly overvalued business and put it into another business, which is what an ethical fund does when it sees something that looks to it like it’s the wrong price. But when a business (or, at least, a business’s stock) is dying — as GameStop’s was — it attracts predatory short sellers. If the business is to remain a going concern, those short sellers have to fail.
U/ronoron and his comrades decided to make all those shares of GameStop that Melvin had borrowed and then sold a lot more expensive to buy back. They bought call options — which is to say they bought the right to buy GameStop stock if the cost rose to a certain price — and then got their friends on the site to do the same thing. With so many people buying calls on GameStop at bizarrely high prices, the stock price started to rise … and rise, and rise some more.
Melvin Capital was a tempting villain, and it has already cried uncle, closing out its short options on GameStop at an enormous loss. It was able to do that and remain in business only because of backing by billionaires Ken Griffin — who, coincidentally, owns Citadel Securities, which bought Robinhood’s order flow — and Steve Cohen — the owner of the New York Mets and the subject of a number of discrimination complaints — both of whom paid fortunes to cover Melvin’s losses.
Related OPINION General Motors, Sears and Toys R Us: Layoffs across America highlight our shredding financial safety net It’s somewhat questionable whether what the Redditors did is strictly legal, and Nasdaq has already vowed to halt trading on any stock linked to what it is terming unusual social media activity. On one hand, unlike what Melvin (and many other hedge funds) do, what the Redditors did was all done out in the open. On the other hand, if people who worked for an investment firm stated their intent to change the price of publicly traded stocks by buying them in specific ways, they would probably have gotten into trouble with financial regulators.
But the Redditors aren’t an investment company, and their actions don’t appear to be a pump-and-dump scheme that would allow regulators to get involved; they’re a motley crew, of course, but some truly appear to believe in GameStop. A year ago, they even joked about the subreddit’s formally acquiring the company by purchasing common shares; now some of the users are talking about that possibility a little more seriously.
Perhaps Wall Street will eventually regulate away the ability of everyday people with online trading accounts and a dream to ruin the days of predatory hedge funds for sport.
It’s likely to be overstating the case to say users on WallStreetBets are buying GameStop purely for the love of the company or their own PlayStations: On the board, hatred for Melvin, its founder, Gabe Plotkin, and hedge funds generally is readily apparent, as is an eagerness to use new tools like Robinhood to leverage the power of a little bit of money in the craziest possible way.
But they also see their online actions as being in the service of something tangible — GameStop — that they love and see as on their side and where many of their partners in posting have worked . And now, with its share price in the stratosphere, GameStop can actually issue new stock, if it wants to, or it can use the sudden windfall to buy another business.
(A similar “short squeeze” — i.e., a squeezing of short sellers — happened with the embattled theater chain AMC; the company now says it will be able to avert bankruptcy .)
Perhaps Wall Street will eventually regulate away the ability of everyday people with online trading accounts, a few hundred dollars and a dream to ruin the days of unimaginably wealthy, predatory hedge funds for sport. Janet Yellen is concerned , and Eric Kuby, the chief investment officer at North Star Investment Management, told Reuters that the trades were “completely decoupled from any kind of economic reality.”
Related OPINION We want to hear what you THINK. Please submit a letter to the editor. But at the moment, it is giant financial services firms like his that seem decoupled from reality to normal people, who see the businesses as able to profit off the misery of everyone else. For many of the rest of us, turnabout feels like fair play.
It’s, of course, satisfying to think of this as a David-vs.-Goliath battle. Unfortunately, that’s not the whole story: Because Citadel Securities holds exclusive access to Robinhood data and Robinhood got fees for the company’s use of it, the real winners are probably the companies on the sidelines, happy to take bets on either David or Goliath, or both, all for a very reasonable fee.
Related:
Stocks soar despite coronavirus and a recession. It’s time for a reality check, and a crash. The Toys R Us bankruptcy is what happens when Wall Street puts profits before people Is cryptocurrency a good investment? Only if you like gambling with your savings. CORRECTION (Jan. 28, 2021, 11:00 p.m. ET): A previous version of this article misstated which company bought Robinhood’s “order flow.” It was Citadel Securities, not Citadel. Citadel Securities is a sister firm of Citadel, a Chicago-based hedge fund.
Sam Thielman Sam Thielman is a reporter and critic based in New York. He is the creator, with film critic Alissa Wilkinson, of Young Adult Movie Ministry, a podcast about Christianity and movies, and his writing has been featured in The Columbia Journalism Review, The Guardian, Talking Points Memo and Variety. In 2017 he was political consultant for Comedy Central’s “The President Show.”

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