Ziryan Aziz explores how Reddit, Wall street, and GameStop help us understand wealth inequality in the stock market.
Photo by Chris Liverani
For many of us, 2021 already hasn’t lived up to expectations. The first three months have already seen a military coup in Myanmar, a failed insurrection in the US, and new strains of Covid-19 spreading across the world – but January also saw a notable, but often misunderstood, financial battle between Redditors and Wall Street.
In the summer of 2020, GameStop, a well-known, but failing videogame and electronic store in the US, had a share price of $4. By last December, this had risen to $20, which gradually increased over the following month to reach a peak of $483 in late January, despite having struggled due to the pandemic.
WallStreetBets
Responsibility is owed to a subgroup on the online forum Reddit, r/wallstreetbets, whose 1-million strong group of ‘degenerates’ (the official name for their members) are comprised of every-day people who play the stock market. After the sub-Reddit's founding member identified GameStop as an undervalued company, there was a giant push to buy shares. The store showed promise after online sales increased by 309%, and a new investor, Ryan Cohen, made the company’s future look promising.
WallStreetBets members started buying up and holding onto their GameStop shares instead of selling them, which caused the share price to skyrocket. With new media attention on the story, more people were buying stocks in the company, which only further increased the share price. Even SpaceX founder Elon Musk tweeted a link to the Reddit group with the caption “Gamestonk!!”
In only a matter of months, these ‘misfits’ were making ground-breaking waves in the financial world. The subreddit’s Discord chat was going crazy, the group was filled with members spamming “hold!”, “To the moon!”, and “buy, buy, buy!”, and it looked to many that there was no limit to how far the price could go.
However, not everyone was so excited. By holding onto their shares, the Redditors were causing a ‘short squeeze’ for investors who had other ideas in mind; big hedge funds like Citeron Research and Melvin Capital Management were largely capitalising on ‘shorting’ the shares of Gamestop.
‘Shorting’ refers to the process by which investors bet that a company’s stock will become less valuable by selling shares that they do not own with the hope that they will be able to buy the share in the future at a lower price. For example, if I sold you some shares of my company for £10, I could buy the real shares from this company in the future for £4. This £6 profit, however, would only work if the share price decreases.
The Rise of DIY Investors
Whilst the the Redditors were rejoicing in seeing their beloved store return to its former glory (albeit only artificially), and further making some money in the process, this shift in share price was even more significant — they were fighting against the established investors and hedge funds, who were clocking losses in the billions, since the decrease in share prices never came and there is no cap on how much these hedge funds could lose. WallStreetBets members knew this, and many were motivated by their attempt to dethrone the large financial companies; eventually, even Citeron and Melvin would have to legally buy their GameStop shares to close any deals they had formally made.
The rise of DIY investors is, for many, a sign that even young and inexperienced investors wield power in a system thought to be dominated by established financial titans. These Redditors have seemingly unnerved some on Wall Street. Robinhood — the trading app popular with WallStreetBets members — temporarily started limiting the number of shares that users could buy. Other trading platforms followed suit, though some platforms like Webbull and M1 claim they were forced to do so by their clearing house Apex.
US politicians such as Rep. Alexandria Ocasio-Cortez and Rep. Ted Cruz have argued that these recent events expose systems of inequality in the stock market, pointing out that hedge funds do not have the same restrictions as those temporarily imposed by Robinhood. The Whitehouse has even said that it is monitoring the situation, and many feel that the slew of negative articles brandishing the Redditors as irresponsible, foolish, and part of some wider sign of social decay, only reaffirm the existent inequalities in the financial industry.
The current wealth inequality in the US is often overlooked, which has been increasing since the 2008 recession. Average salaries for middle-class families have remained relatively stagnant when compared to the ever-rising earnings of the wealthiest individuals, who, especially during the pandemic, have seen massive increases in their earnings.Taking this into consideration, you might understand how some Redditors see their battle with Wall Street hedge funds as a class war, exposing how the perceived elites are able to decide who can and cannot make money, who is regulated and who is not, and even what ought to be considered illegal.
As of early March, the share price of GameStop sits at around $137; most WallStreetBets members have begun selling off their shares, and it is predicted that the hsare price continue falling. Nevertheless, the ‘revolutionary spirit’ of the Reddit group still remains strong; as user u/conciselouis puts it “ROUND 2! We've refuelled, and now we're going to pluto”
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