GME Redit Phenomenon: How a Reddit Group Moved Markets

The GME Reddit phenomenon was a perfect storm of social media, finance, and community that caught everyone off guard. It started in 2020 with a small group of traders on Reddit's WallStreetBets forum, who were attracted to GameStop's (GME) heavily shorted stock.

The group's focus on GME was sparked by a single post, which highlighted the stock's high short interest and potential for a short squeeze. This post went viral, attracting thousands of new users to the subreddit.

The community's enthusiasm and collective buying power helped drive up the stock's price, creating a feedback loop that further fueled the momentum. As the price rose, more investors joined the trade, and the stock's short interest continued to climb.

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GameStop's stock price had been declining due to competition from digital distribution services and the COVID-19 pandemic, leading many institutional investors to short-sell the stock. Approximately 140 percent of GameStop's public float had been sold short by January 22, 2021.

Analysts noted that short interest exceeding 100 percent of a company's public float had only occurred 15 times in the prior 10 years. This suggests that the short-selling of GameStop's stock was unusually high.

However, investors like Michael Burry and Ryan Cohen recognized the value in GameStop and invested heavily in the company. Cohen even joined GameStop's board in January 2021, triggering a stock rally.

By June 1, 2023, GameStop's investors had directly registered (DRSed) 76.6 million shares with their transfer agent via the direct registration system.

Many other stocks, including AMC Entertainment Holdings, Inc. and BlackBerry Limited, also saw sharp price increases due to short squeezes. Here are some selected stocks that experienced price increases:

In response to the short squeezes, brokerage firms like Robinhood and Webull halted purchases of certain stocks, citing increased collateral requirements from clearing houses.

The online discussion around GameStop (GME) on Reddit's r/wallstreetbets community was a key factor in the stock's price surge.

The community was known for discussing meme stocks and high-risk stock transactions, and observers believed the company was being significantly undervalued.

Dude everyone thinks I'm crazy, and I think everyone else is crazy is a quote from a user on the subreddit, highlighting the bearish sentiment at the time.

This user, like many others, expected the narrative to shift in the second half of the year when investors start looking for ways to play the console refresh.

Keith Gill, known by the Reddit username "DeepFuckingValue" (often referred to as "DFV"), purchased around $53,000 in call options on GameStop's stock in 2019 and saw his position rise to a value of $48 million by January 27, 2021.

Gill, a 34-year-old marketing professional and Chartered Financial Analyst (CFA) from Massachusetts, stated that he began investing in GameStop during the summer of 2019, after believing the stock to be undervalued.

He shared information regarding his investment on r/wallstreetbets, providing regular updates on the investment's performance, including times when the investment had plunged.

Another user, Stonksflyingup, posted a humorous video on October 27, 2020, explaining how a short position by Melvin Capital could be used to execute a short squeeze.

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The r/wallstreetbets subreddit had received 73 million page views in 24 hours –– breaking all-time traffic records –– on January 27, 2021.

The community surged by 1.5 million users overnight –– to a total of 6 million users –– making it the fastest-growing subreddit at the time.

Reddit moderators temporarily closed the subreddit to the public, and Discord moderators temporarily banned the server for "hateful and discriminatory content."

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Short selling is a finance practice where an investor borrows shares and sells them, hoping to buy them back later at a lower price. The practice carries an unlimited risk of losses, as there's no limit to how high a stock's price can rise.

Short sellers are exposed to a risk of short squeezing, which occurs when the shorted stock jumps in value due to favorable news, forcing the short seller to buy back the stock to limit losses.

A short squeeze can result in a cascade of stock purchases, further raising the share price. This happened with GameStop, where the stock price surged 400% after a short squeeze.

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The r/WallStreetBets community on Reddit took matters into their own hands by driving up the stock prices for shares like GameStop, AMC, and others through social media. They targeted hedge funds that had shorted the stock.

The community's efforts led to a significant increase in GameStop's stock price, briefly hitting $500 from $18 just a few weeks ago. This was after the company named new directors to its board to help speed its turnaround.

The GameStop saga sparked a wave of investigations and reactions from government officials and regulatory bodies.

The US Treasury Secretary Janet Yellen convened a meeting of financial regulators to discuss the volatility surrounding the short squeeze, after receiving permission from Treasury Department ethics lawyers due to her past speaking fees from Citadel.

Speaker of the House Nancy Pelosi announced that Congress would review the situation, while Senator Sherrod Brown announced a Senate Banking Committee hearing on the state of the stock market and alleged market manipulation. Representative Byron Donalds called for an immediate investigation into Citadel and Robinhood.

The US Securities and Exchange Commission (SEC) launched a review of the incident, aiming to protect retail investors from abusive or manipulative trading activity and identify potential wrongdoing.

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Several investigations were launched in response to the GameStop short squeeze.

The Biden administration was monitoring the situation, with Treasury Secretary Janet Yellen convening a meeting of financial regulators to discuss the volatility.

Speaker of the House Nancy Pelosi announced that Congress would be reviewing the incident.

The U.S. Securities and Exchange Commission announced it was reviewing the incident to protect retail investors from abusive or manipulative trading activity.

Attorney General of New York Letitia James confirmed that her office would look into the matter.

Texas Attorney General Ken Paxton said he would investigate the decision of brokerages to limit the buying of securities related to GameStop and other stocks, calling it "corruption".

His investigation has extended to 13 entities, including Robinhood, Interactive Brokers, TD Ameritrade, and Citadel Financial.

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As investigations into the matter unfold, reactions from various stakeholders are pouring in. Some people are calling for greater transparency and accountability.

The government has released a statement assuring the public that they are taking the issue seriously and are working to get to the bottom of it.

Protesters have taken to the streets, demanding action and answers. The demonstrations have been largely peaceful, but some have turned violent.

The opposition party has released a scathing report, criticizing the government's handling of the situation.

Many retail investors, including those on r/wallstreetbets, suffered significant losses after buying shares of GameStop and other affected securities at peak prices.

Some retail investors held onto their long positions as the stock prices declined rapidly, despite widespread calls to sell.

The Securities and Exchange Commission is "closely monitoring and evaluating" the situation, and will work to protect investors and fair markets.

Brokerages like Robinhood temporarily blocked investors from buying those shares, angering small investors and sparking outcry from leaders in Washington.

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Robinhood, a popular retail investment app, temporarily blocked investors from buying certain shares, sparking outrage among small investors and lawmakers.

This move raised questions about the company's relationship with Citadel Securities, a market-making firm that routes a significant portion of Robinhood's customer orders.

Citadel Securities is the sister company to Citadel LLC, which invested $2.75 billion into Melvin Capital, a hedge fund that was heavily shorting GameStop shares.

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Robinhood's decision to restrict trading of GameStop shares led users to suspect that Citadel Securities was directing the company to do so.

However, Citadel CEO Kenneth Griffin denied any pressure on Robinhood, stating "absolutely not" when asked if anyone in Citadel had pressured the company to restrict trading.

Robinhood also denied being pressured by Citadel, but the company's relationship with Citadel Securities is still a point of contention.

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Several brokerages, including Robinhood, temporarily blocked investors from buying certain shares, angering small investors and sparking outcry from leaders on both sides of the aisle in Washington.

This move was seen as hurting the little guy, as Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Ted Cruz, R-Texas, found common ground on social media to criticize the decision.

The Securities and Exchange Commission has since jumped into the mix, saying it's "closely monitoring and evaluating" the situation and "will work to protect investors" and fair markets.

The system seems unfair, with Lin arguing that the big guys are losing money and trying to change the rules of the game, causing a little panic for retail investors.

For small investors, it's essential to know where they stand in the spectrum of the herd before it turns and it's too late, as Thomas Martin, senior portfolio manager at GLOBALT Investments, notes that the people who will make the most money are the ones who made the first moves and determined when to buy and sell.

Robinhood was criticized for selling shares without consent, but the company denied these allegations.

Several brokerage firms, including Robinhood, stated that the restrictions were the result of clearing houses raising the required collateral for executing trades, which caused a lag between the moment when investors purchase a security and the moment cash and securities are actually exchanged.

This led to increased collateral requirements, with the Depository Trust & Clearing Corporation (DTCC) increasing the total industrywide collateral requirements from $26 billion to $33.5 billion.

On January 29, Robinhood had raised an additional $1 billion to protect the company from the financial pressure placed by the increased interest in particular stocks and meet the collateral requirements of clearing houses.

As of January 29, Robinhood was still imposing limits on the trading of GameStop, AMC, and Blackberry stocks, but by January 31, the company had removed several of these restrictions and would only limit purchases of eight securities.

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GameStop FOMO is a real phenomenon. Julie Hembeck, a physics and math tutor, bought one share of GameStop last Wednesday, knowing she could lose money.

The idea of making a large profit in a short time is appealing to Hembeck, who's taking a risk with a portion of her money to see if she can grow her portfolio faster.

Shares of GameStop spiked rapidly, triggering automatic halts designed to protect against volatility. The hashtag #SaveAMC was trending on Twitter, highlighting the similar story playing out with shares of AMC.

Hembeck ended up selling her GameStop share after online brokerages restricted trades and bought shares of Nokia instead, which was discussed on Reddit.

Companies with higher stock value saw significant gains in recent days. GameStop Chair Kathy Vrabeck and board member Raul Fernandez sold shares from January 13 to 16, making $1.4 million.

GameStop CEO George Sherman owns over 2.3 million shares in the company, worth $901 million on January 29. This is a huge increase from December 31, when the value of his stock was $44 million.

Here's a list of some other companies with increased stock value:

Shares of GameStop and AMC spiked rapidly, triggering automatic halts designed to protect against volatility.

The hashtag #SaveAMC was trending on Twitter, highlighting the community's enthusiasm for the stock.

Julie Hembeck, a physics and math tutor, bought one share of GameStop for fun, knowing she could lose money, and ended up selling it after online brokerages restricted trades.

She then bought shares of Nokia after seeing it discussed on Reddit, and hopes to make more money to put into her Roth IRA.

The idea of making a large profit in a short time is appealing, but it comes with a risk.

Some investors, like May, are holding their positions in hopes of making even more money, despite the violent market fluctuations.

A part of May wants to cash in and walk away, but another part knows this isn't done yet.

GameStop's stock surge began with a legitimate reason: the company added three new directors to its board, including Chewy co-founder Ryan Cohen, who brought digital experience to the table.

This was a crucial move, as video games are going digital and malls are becoming increasingly irrelevant. Investors liked this move, and the company's stock rose by a little less than 13% on January 11.

The subsequent stock surge was not just a momentary blip, but a sustained increase that saw the company's stock more than double in just a few days.

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The sudden surges in GameStop and AMC have caught Wall Street veterans by surprise. This is partly because millions of young people are opting for online forums like Reddit's WallStreetBets to make investment decisions.

The rise of no-fee apps like Robinhood has democratized investing, giving armchair investors free access to sophisticated trading instruments like options. This technology has upended the way people trade stocks, making it more accessible to a wider audience.

Investors can place relatively inexpensive options bets, and as the stock price gets closer to their wager, they can sell those options for a profit. Big options volumes can drive a stock up or down, typically because options traders buy or sell the stock itself as a hedge.

In the case of GameStop and other stocks targeted by WSB, traders keep buying options, forcing the investors selling those options to hedge their bets by buying up GameStop stock. This creates a self-reinforcing cycle that drives the stock price up.

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GameStop's financial struggles are a big part of why some investors might short the company. The company is expected to lose money this year and next.

Sales growth is sluggish because gamers no longer need to go to the mall to buy games or consoles. This shift to digital gaming is a significant change.

The addition of Chewy co-founder Ryan Cohen to GameStop's board was a major catalyst for the stock surge. Cohen brings digital experience to the table, which is desperately needed by GameStop.

GameStop's stock rose a little less than 13% on the day Cohen was announced as a new director. This was just the beginning of a wild ride for the company's stock.

Senator Elizabeth Warren criticized both the short sellers and the buyers, arguing that more regulation was needed to prevent the stock market from being treated like a "personal casino".

Public figures such as Reddit co-founder Alexis Ohanian and billionaire investors Mark Cuban and Chamath Palihapitiya expressed sentiments sympathetic to the retail investors, comparing the rally to Occupy Wall Street and praising the ability of retail buyers to push back against hedge funds.

In a CNBC interview, Alexis Ohanian compared the rally to Occupy Wall Street, saying it's a chance for "Joe and Jane America—the retail buyers of stock—to flex back and push back on these hedge funds."

Here are some notable public figures who expressed support or criticism for the Redditors:

Some notable celebrities and influencers also spoke out against Robinhood, with actor and rapper Ja Rule calling the company's actions a "fucking CRIME" and comedian Jon Stewart expressing support for the Reddit traders on Twitter.

The GameStop saga has inspired a range of media adaptations.

A feature film based on the events is in the works, with Netflix planning to develop the project and Noah Centineo set to star.

In addition to the film, MGM acquired the rights to make its own movie, Dumb Money, which was released on September 22, 2023.

A limited-run series, To the Moon, was also announced, based on the life experience of Jaime Rogozinski, who founded r/wallstreetbets in 2012.

Several documentaries have been created, including GameStop: Rise of the Players, which was released on January 28, 2022, and features interviews with r/wallstreetbets users.

Another documentary, Eat the Rich: The GameStop Saga, premiered on Netflix in September 2022, as a 3-episode limited-run series.

HBO developed a mini-series, Gaming Wall Street, which was released on March 3, 2022.

Public figures have been weighing in on the GameStop stock controversy. Alexandria Ocasio-Cortez, a member of the Financial Services Cmte, suggested a hearing to investigate Robinhood's decision to limit trades.

Several politicians, including Ted Cruz, Ro Khanna, and Rashida Tlaib, expressed support for the retail investors. On the other hand, Senator Elizabeth Warren criticized both the short sellers and the buyers, calling for stronger regulatory action.

Reddit co-founder Alexis Ohanian compared the rally to Occupy Wall Street, saying it's a chance for retail buyers to push back on hedge funds. This sentiment was echoed by billionaire investors Mark Cuban and Chamath Palihapitiya.

Other notable figures who criticized Robinhood include actor and rapper Ja Rule, who called the company's actions a "fucking CRIME". Comedian Jon Stewart also expressed support for the Reddit traders, but later deleted his tweet.

Investor Michael Burry criticized the short squeeze, stating that it's "unnatural, insane, and dangerous". Billionaire investor Leon Cooperman also criticized the Reddit users' market behavior, calling it a result of the federal response to the pandemic.

Here's a list of some of the notable figures who have spoken out on the issue:

Many retail investors suffered significant losses as GameStop's stock price declined rapidly, with some even losing a majority of their savings.

The losses were largely due to the fact that many retail investors held onto their long positions as the stock prices were declining, despite widespread calls on r/wallstreetbets to sell.

Short selling is a finance practice where an investor borrows shares and sells them in the hope of buying them back later at a lower price, but it carries an unlimited risk of losses.

The risk of losses is especially high because there is no inherent limit to how high a stock's price can rise if the short-seller is proven wrong.

Retail investors who bought shares of GameStop as they were reaching their peak prices or shortly afterwards also suffered significant losses.

The combination of holding onto long positions and the practice of short selling led to a perfect storm of financial losses for many investors.