What is Reddit doing to the "stonk" market?

• Author: Jacob Greene
• Posted: 2024-09-15

If you have been paying attention to the news, you've probably seen it: One of the strangest situations ever faced by the stock market. In a nutshell: Reddit has found a way to manipulate the stock market, damage hedge funds, and turn around the fortunes of some of the most destitute seeming stocks on the market. However, that hasn't come without serious ramifications for the entire stock system. So, here's a look at what one subreddit has done to the Gamestop stock, and by extension, the entire stock market.

/r/WallStreetBets

For the uninitiated: Reddit is a social network that consists of millions of users and thousands of specific channels, known as subreddits. These subreddits are organized around a slew of topics. One such example is the subreddit WallStreetBets, which is retail investors that use apps - such as Robinhood - to invest money. The forums moderators and users have been dedicated toward giving each other investment advice, and starting around January 21, members of the subreddit began a coordinated effort to boost up the price of the Gamestop stock.

Why Gamestop?

Gamestop's stock - and the company in general - have been circling the drain for years, losing money, closing stores, and presenting no recovery plan to adjust to a changing industry. Their entire business model - selling physical copies of video games - has become woefully outdated, as the games market has shifted to digital sales.

That began to change with the investment and board membership of Ryan Cohen, an activist investor who helped to found the company Chewy. Rallying around the company, members of the WallStreetBets began to buy stock in Gamestop, and slowly, the price began to rise.

This was bad news for the countless investors and hedge funds who were shorting the stock. A stock short is essentially when an investor borrows the stock of another and sells it. Their hope is that the price of the stock will fall. They will then "buy" that stock at the lower price, resulting in a profit.

The Short Squeeze

When the stock of Gamestop began to climb, multiple things happened. First, as demand rose and news of the play broke out, others rushed in, buying Gamestop and sending it's price even higher. This resulted in a short squeeze, which occurs when sellers who are short a stock wind up buying it back in order to cover their losses. This, however, only further adds to the pressure to buy the stock, sending the price even higher.

All of these moves sent the stock through the roof, hitting an all-time high of $347.51 at one point. Wild fluctuations began shortly thereafter. As of the close of business on January 28, 2021, the stock sat at $193.60 - a 44% drop from where it started the day, but a 400% increase over where it was before the madness surrounding the stock began.

The efforts have been supported by a variety of celebrity investors, like Elon Musk, who tweeted "Gamestonk!" in support of the effort.

However, it's also attracted quite a bit of negative attention and led to negative publicity for everyone involved. The Discord server for WallStreetBets was shut down, although the company said that was as a result of hate speech, not the financial move that they were engaging in. WallStreetBets was also shut down periodically in late January, citing technical difficulties. 

The real controversy started when Robinhood - a popular retail stock selling app - stopped allowing users to buy stocks and began to close out positions of certain customers without their consent. This led to widespread protests, Congressional attention, and a class-action lawsuit - and that all occurred within eight hours! White House Press Secretary Jen Psaki has said that the White House is monitoring the situation, and it seems very likely that more attention and regulation will be coming on this issue. 

The entire situation has been eye-opening for many people. Power has been upended in the stock market, with the coordinated effort of retail buyers devastating numerous hedge funds that had short positions with Gamestop, and additional regulation seems very possible for the entire market. Time will tell what this truly means, but there seems to be little question that the entire event was historic within the context of the stock market and traditional market dynamics.