When the fun stops, Gamestop: The story of the internet cowboys who waged war on Wall Street
Financial illiteracy and 2008 crash revenge: here Oliver gives a crude rundown of this month’s Gamestop events.
Before this year, taking r/WallStreetBets seriously would have been laughable. There are countless stories of their truly awful financial advice, “YOLO” attitudes to investing, and huge losses. It doesn’t take an economics degree to recognise that the post-ironic internet attitude doesn’t play well with the intentionally complex world of options trading. Well, that was, until it did.
It began in September 2019 with Roaring Kitty, real name Keith Patrick Gill. A 34-year-old financial analyst may seem like an unlikely bedfellow with the subreddit, but his belief in GameStop stock being undervalued struck a chord with the predominately white male users of the platform. The chance to save a company they loved was an attractive proposition. That, and it was becoming increasingly clear Wall Street was shorting the stock.
Shorting is a common financial practise. A broker bets on a stock’s value declining, and therefore borrow stock they don’t have to sell. When the stock devalues, they buy it back at a cheaper price and pocket the difference. The caveat is that the gains are entirely theoretical. For every short sell there is a short squeeze. If enough people buy the stock, the value rockets back up, forcing short sellers to buy back at a higher price, which in turn squeezes the price higher like toothpaste in a tube. And like toothpaste, the greater squeeze, the messier it will be for person on the other end.
Some on Wall Street would argue that short selling helps keep overvalued stocks in check, serving a regulatory function in the market. I disagree. Short-selling, in my view, is gambling with people’s suffering, and to some degree market manipulation. When companies fail, people lose their jobs, their income. GameStop employs 14,000 people across the U.S. alone. The lower their stock price goes, the greater the win on Wall Street. It was only a matter of time before someone realised what was happening with GameStop stock and that there was an opportunity here to make money. What they didn’t realise was how far it would go.
Let’s give a little bit of context here. When markets opened on 4 January, GameStop shares sold for as little as $17.25, which was up from measly $3.25 they sat at in April 2020. Can anyone guess how this stock valued by the 28th January? Anyone? If you had guessed a mind-boggling $347.50, you’d be bang on the money, literally. GameStop, a company who have been on the decline for years, was officially a Fortune 500 company. Even the Biden administration was commenting on it. Forget the memes; this was no laughing matter.
The war on Wall Street may be an entertaining headline, but the tragedy is that these cowboys lost this war.
The squeeze has been often characterised as a war on Wall Street. One infamous post declares the squeeze as a “personal” act of vengeance against the one per cent and 2008 financial crash. It’s not hard to see why of course. In the U.K. alone 2.7 million people were unemployed by 2011, and earnings have dropped far below prices. If you factor in the austerity response, people lost their lives as a result of the subprime mortgage bubble bursting. And in the U.K., only thirteen people faced criminal charges, and of those, only five were convicted, with jail time for the most part sitting four years and below. To say Wall Street was deserving of a comeuppance would be understatement.
But don’t be duped into thinking this was some proletarian revolution. On the contrary, and as previously mentioned, this was mainly a contingent of angry white men versus the establishment, the same sort of men which under different circumstances may have found themselves stumbling down the alt-right rabbit hole. The shameful fact is that financial literacy is lower in BAME communities and amongst women; a 2019 Nielsen study, only 33 per cent of women take independent investment decisions as compared to 64 per cent of men, and another study found that about half of African-Americans and almost one third of women were considered financially fragile. Considering the Wallstreetbets discord server was shut down on allegations of hate speech, it’s easy to see the sort of unsavory figures that made up a movement that describes themselves as if “4chan found a Bloomberg terminal”.
Of course, the GameStop squeeze wasn’t exclusively for young white men though; hedge funds were also more than happy to hop on board the rocket ship. Just look at Senvest Management, who made $700 million on its Gamestop investment after seeing the buzz emerging on the internet back in 2020. This isn’t to say that funds didn’t sustain any casualties. Far from it in fact; losses on short positions in U.S. firms topped $70 billion, and Melvin Capital saw estimated losses of 53 per cent. Yet the idea that this was a revitalisation of the feelings that drove Occupy Wall Street nearly decade ago is only half the truth. And like Occupy Wall Street, the big squeeze ultimately ended in failure.
Financial systems are complicated, and your average retail investor is often at a disadvantage. Access to brokerage apps turns investing into a casino, encouraging ordinary people to gamble their money away on options they barely understand. However, when it came to GME things were different. As the term option implies, these give investors the option to buy a stock at the current retail price at a later date. For an option to work, sites like Robinhood have to actually back the option on assumption that it will be called. So when everyone began investing in Gamestop, AMC and other shorted stocks, these brokerage sites had a problem: they didn’t have the money to back these investments.
The solution? They simply closed the market on these volatile stocks to retail investors, whilst professionals still had access to the market. An inelegant and much criticised solution, one which earnt the combined ire of both Ted Cruz and AOC, but one perhaps necessitated by the flawed system itself. With the ability to buy these stocks diminished, the market was throttled. Prices sank immediately, and the calls of “hold the line” and “diamond hands” instead left many people holding the bag on worthless stock. By blocking trading for retail investors, the 99% were put a significant disadvantage, and by the end of January the mission to the moon was crashing back down to Earth.
Wallstreetbets may be “the wild west of financial advice”, but it’s often not one where the cowboys walk off into the sunset. This is the bleak, brutal frontier, where the cards can change at any second. The war on Wall Street may be an entertaining headline, but the tragedy is that most of these cowboys lost this war. The systems that keep the money flowing were proven not to work in their favour, the stock market was shown to be predatory as any sleazy Laz Vegas casino, and those lured into playing the game weren’t always the valiant heroes we hear about. Perhaps then, if we are to learn any lesson from the Big Squeeze that rocked Wall Street, then we should learn this; no matter what happens, the house will always find a way to win.