How Reddit posters made millions as Wall Street lost billions on GameStop’s wild stock ride

A meteoric rise in the share price of GameStop has trained the eyes of stock market watchers on a fast-growing Reddit discussion board called Wallstreetbets, where it appears that 20-somethings armed with cheap and easy stock-trading apps like Robinhood, MooMoo and TradeStation are targeting stocks to soar and hedge funds for takedowns.

The drama has sent GameStop shares up nearly 2,000% in the past month. On Wednesday, the stock price of the troubled retailer of video games soared yet again, this time up more than $200, to surpass $350 a share.

While GameStop shares have been a favorite of Wallstreetbets members, the money-losing company has been closing stores and been a target of hedge funds and so-called short-sellers who wager that the shares of particular companies will fall.

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Wallstreetbets posters have fought back by vowing never to sell, egging each other on to buy more shares and attacking critics of their favorite stock. Andrew Left, a noted short-seller who had predicted GameStop’s demise, last week stopped commenting on the company, saying his family had been threatened.

Now, Wallstreetbets members appear to be widening their aim to focus on other companies that, much like GameStop, the rest of Wall Street has left for dead. Shares of former phone maker Blackberry, LaCroix seltzer owner National Beverage and troubled movie chain AMC have also soared after mentions on the Reddit board. 

At a time when viral online movements are having a growing influence on real-world events, including the deadly storming of the Capitol on January 6, some are describing the Wallstreetbets saga as the stock market’s conspiracy-peddling equivalent. Wallstreetbets is Occupy Wall Street meets QAnon, goes the thinking. Its posters talk about taking revenge on the hedge funds they insist have secretly controlled Wall Street and hail their recent triumphs as a win for the 99%.

“Hedge fund managers live in the past, and continue to look down upon the retail investors,” wrote one Wallstreetbets commenter on Wednesday. “This is the world they want to live in. This was the past.”

Talk of overnight riches

Adding to the interest: claims of overnight riches. One prominent Wallstreetbet member said he turned a $50,000 investment into $22 million, mostly in the past few weeks. Kevin Roose, a New York Times reporter, tweeted on Monday about a chat that included a “prepubescent kid” saying he had made $15,000 on GameStop that day by trading on his brother’s investment app. 

It’s all reminiscent of the day-trading boom in the late-1990s when many retail investors saw their portfolios soar but were ultimately wiped out by the dotcom bubble. Only this time it may involve young investors who weren’t even born in the late 1990s.

One caveat: Reddit, like other internet discussion boards, is an anonymous environment. That means it’s virtually impossible to know whether the people chatting on Wallstreetbets are actually buying shares, who they are and if they are actually making money off their trades. Some have called the clash over GameStop a classic fight between David and Goliath. 

But Wall Streeters, stock promoters and even CEOs have been known to talk up investments in internet discussion boards, so there is no way to know if this is actually a case of Main Street winning one over Wall Street. 

Following is what we do know about Wallstreetbets, GameStop’s astounding rise, its “short squeeze” of hedge funds that had bet against the company’s shares, and whether “meme stocks” are the new dotcom bubble.

What’s Wallstreetbets?

Wallstreetbets is a fast-growing Reddit board with more than 2.4 million followers, including at least 100,000 new followers in the past 24 hours. Like at other internet discussion boards, users typically go by an online handle rather than their real names. Much of the discussion is about stocks, and it comes with plenty of attitude and tough talk. 

The Wallstreetbets board calls its followers “degenerates.” Members are told to keep the discussion to stocks and away from politics, and to only brag about actual trades, not ones they wished they’d made. “Nobody gives a s**t about your preschool’s trading competition,” the board’s rules state.

Board members have also coined their own terms. “Tendies,” for instance, are stock market profits. It appears to be short for chicken tenders, which one poster on the Reddit board calls a dish suitable for kings and financial oligarchs.  

One of the most popular Wallstreetbets members posts by the name DeepF**kingValue. In mid-2019, the poster began promoting the idea that he was buying GameStop options that would pay off if the stock reached $8 by the end of January 2021. At the time, the stock was trading for just over $4 a share, and the options appeared to cost around $50,000. He regularly posts what appears to be an account statement, which as of Tuesday night showed that those same options were now worth just over $22 million.

Why have shares of GameStop soared?

Wallstreetbets may be one reason but it’s not the only one. GameStop got its first mentions as a recommended investment on WallStreetbets back in mid-2019, long before the stock began rising. That suggests what is fueling the stock’s stratospheric rise now isn’t just the latest discussion board chatter. 

The recent run in GameStop’s stock appears to have started shortly after Ryan Cohen, the co-founder of Chewy, joined the company’s board. Cohen, whose investment firm has amassed a 10% stake in GameStop, wants the troubled retailer to focus more on online sales.

What’s a “short-squeeze”?

Another reason GameStop’s shares are rising: Wall Street mechanics. Enter the short-squeeze explanation.

When short-sellers bet a stock will decline, what they effectively do is sell shares they don’t have, with the promise of delivering those shares to the buyer at a later date. That’s where the term short-sale comes from. 

The problem is that if the stock goes up instead of down, short-sellers must quickly buy the shares they don’t actually own to avoid further losses. If many short-sellers all think that a given stock will fall, as they were with GameStop, which hasn’t turned a profit in three years, and the stock goes up, mayhem can ensue in the rush to buy shares. That’s what appears to have happened.

Still, the cheerleading from commenters on Wallstreetbets does seem to be playing an outsized role in GameStop’s near-2,000% rise. What’s more, it appears at least some of the posters have a fair amount of Wall Street savvy. 

GameStop was the most shorted stock on Wall Street in early January. Some of the Wallstreetbets posters seem to understand that targeting it, and buying up the stock as a group of individual traders all rowing in the same direction, would cause a short squeeze and the stock price to soar.

Are shares of GameStop being manipulated?

The coordinated buying effort has caused some to call GameStop’s stock surge a case of market manipulation. But there isn’t a lot of evidence of that.

On Tuesday, Michael Burry, who became famous for predicting the 2008 housing bust (and was a central figure in Michael Lewis’ book, “The Big Short”), tweeted that while he’s a believer in GameStop, even he thinks the huge rise in its stock price suggest something illegal is going on. 

“There should be legal and regulatory repercussions,” Burry tweeted. “This is unnatural, insane, and dangerous.”

Hedge funds and other large institutional investors are not allowed to coordinate their stock purchases. But individual investors aren’t subject to the same restrictions, and there doesn’t seem to be any rules barring them from discussing what stocks they like or don’t like. 

So while seasoned traders like Burry and regulators might not like to see what is happening with GameStop, for now there doesn’t seem to be a lot the Securities and Exchange Commission or anyone else could do about it.

Are “meme stocks” the new stock market bubble?

GameStop shares certainly seem like they have entered bubble territory. Sales are down by 300% at the company, which is in the process of closing 1,000 of its more than 5,000 stores. And that drop has happened during the pandemic, with people spending more on home entertainment, not less. 

At $350 a share, GameStop now has a stock market value of $26 billion. That’s more than the combined market value of the Gap, Kohl’s and Macy’s. 

Other Wallstreetbets stocks appear to entering bubble territory as well. Shares of AMC rose $9 on Wednesday to nearly $15, and are now up 600% in the past month, despite the fact that most of AMC’s movie theaters remain closed due to the pandemic and the company has been on the brink of bankruptcy.

“This is not the first time we have seen speculative bubbles,” Thomas Gorman, a partner at law firm Dorsey & Whitney and an expert in securities law who spent seven years at the SEC, told CNBC on Wednesday. “It’s just the latest.”