Late last week, Reddit woke up to a strange but oddly foreboding revolution: a call to buy stock from ailing video game store GameStop. The trend’s seeds, an explosive thread from the oft underrepresented but equally as chaotic subreddit r/WallStreetBets, spoke of the stock’s inherent strength after a period of stagnation borne from the pandemic. Naturally, no one believed the seemingly meme-worthy claim. 

Now, a week later, GameStop is one of the most profitable stocks on Wall Street, to everyone’s surprise. If you weren’t on Reddit when everything went haywire, you’re likely wondering what happened. Why is GameStop trending? Should you buy GameStop stock now? It’s not as simple as 1-2-3.  

The tech players 

On the tech side of things, the biggest two factors are, obviously, Reddit and, less obviously, micro-investing apps. 

Last year, a heavy r/WallStreetBets user, u/DeepFuckingValue, heavily speculated on GameStop’s eventual success. The Redditor poured in US$ 50,000 for shares in GME. In investing as much into the seemingly dying stock, they, along with others who followed in their path, hoped to cause a short squeeze on all those who bet options on its failure. 

This is where micro-investing apps come in. r/WallStreetBets is not a community for investment firms or professionals. Most of the community are middle-class Americans, trying to find the next big pick for a quick buck. That said, the requirements of more robust investing firms are often too steep for the average American. Like Robinhood and Webull, micro-investing apps allow users to purchase stocks without a minimum required and easily from their phone. 

With an easy-to-use app, r/WallStreetBets raised an army of GME buyers, which rapidly skyrocketed the stock’s price. The stock was up 6000 percent since its low point last summer. While Reddit gained traction as the trend went along, other investors saw the trend and bought into it without even knowing about Reddit’s involvement until it was too late. 

So how did a Reddit community take down a hedge fund?

To understand how the Redditors managed to take on hedge funds with billions of assets under management, we need to understand the meaning of a “short.” A short is when a trader borrows stock from a broker and immediately sells it at the current price. The brokers, in this case, are micro-investing apps like Robinhood.

On an ordinary day, if you buy Stock A for US$ 10 and sell it for US$ 12, your realized profit is said to be US$ 2. This is the fundamental concept on which every business runs. On the other hand, a short-seller places a bet that the stock price will fall so that they can purchase the stock back at a lower price and return it to the broker. In this case, they profit from the difference between the original price at which the stock was sold and the price at which it was repurchased.

In simpler terms, if the trader borrowed the stock for US$ 12 and repurchased it at US$ 10, the realized profit is said to be US$ 2. But the risk involved is equally the same. If the stock price does not decrease like the trader had expected and rises to US$ 14, the trader ends up taking a loss of US$ 2 because they have borrowed the stock from the broker and need to pay for it.

In GME, Melvin Capital, a hedge fund based out of New York, had bets against the stock by short-selling its shares. Members of r/WallStreetBets decided to start accumulating GME so that the price climbs and inflicts a loss on Melvin’s short. The move is called a “short squeeze” and took the stock’s value from US$ 17 (at the beginning of 2021) to US$ 150 when trading closed on January 26.

Seeing GME climb unrealistic valuations, it soon caught the attention of pretty much every trader or investor in the US. What started as a micro-managed movement against a hedge fund became a widespread revolt against the bears. In the end, Melvin was forced to close its position on GME and had to take external support from its backers Citadel and Point72, who pumped US$ 3 billion in the fund to keep it alive.

A micro class war 

Unsurprisingly, bigger investors hated GME’s sudden uptrend. The success went against everything their system stood for. In fact, a lot of them called for an official investigation against Reddit for market manipulation. The calls, however, haven’t materialized into any solid repercussions at the time of this writing.  

And why would they? As liberal politician Alexandra Ocasio-Cortez (AOC) put it, “it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.” Reddit was merely playing the same game as Wall Street. 

Out of political options, Wall Street then went after Reddit’s trade tools, the same micro-investing apps that touted a democratized stock market for the middle class. As of Thursday, Robinhood and its contemporaries have stopped or limited buying any more Reddit-implicated stocks. Investors can only sell, but no one is budging. Soon after the announcement, AOC (and surprisingly, Republican Ted Cruz) is pushing for a formal investigation against Robinhood for market manipulation, the same accusation levied against Reddit. 

And so, the meme-worthy investing boom turned into a micro class war between the tough-as-nails, nothing-to-lose Redditors versus long-standing, ultra-rich investors. Echoing the remnants of the Occupy Wall Street movement from years past, both parties are now locked in a tense game of chicken to see who blinks first.  

To Wall Street’s dismay, the investors of Reddit have almost nothing to lose and absolutely everything to gain. Most have already inured themselves to heavy losses on the stock market. If Wall Street wants to complete, they will be forced to expose their system’s double standards against the average investor. 

The repercussions of the war

For most, it’s revenge. The whole point of the short squeeze was to make brokers and funds lose money. We are a crucial junction in time where we’re seeing the norms of capitalism getting challenged. The rich have always jokingly said that the stock market is open for all and that anyone can be rich by leveraging it.

Well, a few folks took it quite seriously and decided to unleash the market’s true potential. Turning the tables in one’s favor. It isn’t just GameStop. Reddit users have started encouraging people to buy shares in Blackberry and AMC theaters.

This is a truly modern, digital, and anonymous vigilantism. People are fed up with the 1 percent and are hitting back in whichever way possible. However, the GME saga has clearly shown us the prime drawbacks of the system. In response to the stock’s unrealistic climb, Robinhood would restrict trading for GameStop and others, effectively preventing investors from purchasing more shares of the stocks. For an app that’s focused on democratizing finance for all, this isn’t a confidence-building measure.

According to Financial Times, US$ 39 million of Robinhood’s revenues come from equities, and options order flow comes from Citadel Securities, a part of Citadel. And it repressed a whopping 35 percent of Robinhood’s revenues. Can two financial institutions rub each other’s backs while smaller clients (retail investors) are left to fend for their own?

Many experts have pointed out that the future of the stock markets will be in everyone’s hands and not just institutions. Even though individuals were always allowed to use the exchanges, they never had any considerable central power against larger funds.

In a nutshell, Reddit has forced the world to reconsider our fundamental financial systems and how they’re played by a few too powerful players. The White House and the SEC are both monitoring the situation with GameStop and the larger stock market.