Last year, stock symbol GME caught the attention of Wall Street, the media and even Congress, thanks to the collective action of individual investors on a Reddit forum. At the time, GameStop’s soaring share price was seen as a revolt against the Wall Street establishment, with some commentators calling it a “decisive moment” for retail investment.
In a new book titled “The Revolution That Does: GameStop, Reddit, and Scammed Small Investors,” Spencer Jakab, editor of the Wall Street Journal, says that while some hedge funds lost money and a few retail investors got richer, the real winners of GameStop’s trading frenzy were professional investors and the US financial services industry.
“Most of Wall Street is made up of middlemen,” Jakab told “Marketplace” host Kai Ryssdal. “They love it when the markets are volatile, and they really love it when people get excited and think they can beat ‘the house’.”
The following is an excerpt from “The Revolution That Wasn’t”.
I’ll never forget the day I thought my sons were degenerate.
With my newsroom closed by Covid-19, I was working from home on the morning of January 25, 2021, when I stopped editing a column for the next day Wall Street Journal mid-sentence to see what they had been up to on the internet. After less than ten minutes of scrolling, I started composing an email. It wasn’t their mom or their principal or even a child psychologist. It was to the publisher of the book you hold in your hands.
My eldest, a high school senior, and my youngest, a freshman, were members of a “subreddit” called r/wallstreetbets whose members call other degenerates, monkeys, and some even fewer names flattering. I had been aware of the freewheeling stock market forum social networking site Reddit for about a year at this time – an irreverent alternative to its older, more buttoned-down r/investing board. In the months leading up to the pandemic, with the market booming, every week or so a random stock would jump on heavy volume because its members had started buying in droves. As far as I was concerned, it was an amped-up version of the infamous Yahoo stock message boards of the late 1990s. commission-free trading apps.
When the economy ground to a halt and stocks plunged as the world grasped the severity of the pandemic, older, grayer investors once again failed to heed their own buy advice as others panicked. Not the degenerates, though – perhaps because they didn’t know any better. Fans dove in, and soon they were racing in a circle around investing legends like Warren Buffett. But they were also doing dumb things like buying the shares of failing companies or buying back shares with names that sounded like those mentioned on Twitter by Elon Musk but were actually worthless shells. Traders and fund managers thought it was hilarious. From what I saw and heard that morning, however, Wall Street would laugh no more.
My eldest son had pushed me to dive deep into the subreddit asking if I was writing anything on GameStop. The reason was that a friend of his, a bright boy I had known since they were both in kindergarten, had bought stock in the video game retailer after reading about it on WallStreetBets and almost doubled his money in a few days. When I said he should count himself lucky and sell and he said he absolutely wouldn’t, I was intrigued and started reading the forum.
With three sons, I was all too familiar with GameStop. I had driven them there countless times as they bought records and then later traded them for other records. From editing chronicles on the channel over the years and my sons’ recent preference to bypass the store and buy digital games online, I knew it was a dying business – much like Blockbuster Video after Netflix really started to take off. It was so obvious that it seemed like every hedge fund manager on Wall Street had been betting that its stock price would eventually head towards zero.
But the pros suddenly found themselves up against a group that wasn’t interested in cash flow or the release of the next Xbox. If a stock went up for a week, or a day, or even a few hours and they sold it in time, the degenerates were happy. Over the last year or so, they had noticed that some stocks had gone up simply because they and many strangers they met on Reddit had bought them. There was power in numbers.
Now they were playing a dangerous new game: ruining the lives of hedge fund bosses. There were over two million WallStreetBets members to date, and the group’s membership would quadruple within weeks as they shocked the financial establishment.
Some users had realized that investment funds were exposed to unlimited losses because they had engaged in a technique called “short selling” which allowed them to make profits if stock prices fell – the opposite what most investors do. The funds bet against GameStop was so popular that it left them with a very narrow loophole if the price started to rise sharply for some reason. With brokers like Robinhood allowing inexperienced traders to buy stocks using borrowed money and using derivatives that acted as a force multiplier, amateurs had the wherewithal to do some serious damage.
They also had the motive. There was a lot of resentment in America over wealth inequality and what seemed like two sets of rules – some for the rich and connected and some for everyone else. Their formative experiences included struggling to repay student loans and watching their parents struggle during the financial crisis. What had started as a way to have fun and make money had a particular thrill: getting revenge on the architects of a rigged system.
Intuitive, colorful apps made life surprisingly easy for a generation that had grown up glued to their phones. Bored and stuck at home during the pandemic, they found speculating in the stock market and comparing notes with strangers online to be even more exciting than betting on sports and, in a bull market, far more lucrative too. With almost every stock rising, the challenge was not to pick a winner but to find a trade that would rain down money. Meme-loving influencers who were wealthy, but the right kind of wealthy, were all too happy to make suggestions.
The new class of investors didn’t trust traditional Wall Street advice, but many were more than willing to take inspiration from these influencers and their fellow Redditors. Now some WallStreetBets members who seemed to know a lot about obscure financial topics like short selling and derivatives were talking about an investment opportunity that was a twofer – a way to bundle and send people who were the wrong kind of rich in the workhouse. The only thing was that you needed “diamond hands” – to hold, no matter how high the stock. That’s why my son’s friend didn’t want to sell.
Secretly creating a corner of the stock market where you squeeze a short seller into grabbing all available shares was the kind of thing that happened all the time in 1921, but not in 2021. It has long been illegal. But what if, instead of a few wealthy people doing it behind closed doors, a few million foreigners with small accounts did it in full public view? Even if regulators cried foul, what were they going to do about it?
Not that they paid attention to it because the wave was gaining momentum. Neither were great fund managers. They were too busy staring at their Bloomberg terminals to waste time browsing memes on Reddit. If they had, they would have seen newly minted speculators with tokens on their shoulders writing entries like “biggest short squeeze of your life” and “Institutional Investor Bankruptcy for Dummies.” Some of these managers even reportedly saw their own names as the degenerates scoured the filings of public securities. Instead of taking their pieces when GameStop shares continued to rise, the pros saw a lot of weak hands first and pushed even more chips into the pot. As Hemingway once described as bankrupt, the force that would threaten to bankrupt some of Wall Street’s biggest players hit “gradually then suddenly.”
And then it got weirder. As cascading losses and rising volume threatened to overwhelm not only those funds, but the very plumbing of the financial system, play was suspended. Suddenly, brokers like Robinhood suspended the ability to buy more stocks that were on everyone’s lips. However, no such restrictions were imposed on big cats. The game was rigged!
But it always has been.
Adapted from “The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors” by Spencer Jakab, published by Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House, LLC. Copyright © 2022 by Spencer Jakab.