The Reddit-Gamestop-Wall Street Saga, Broken Down


Bray Tousignant and Tom Tricoli

In late January into early February, there was an intriguing episode that took place on Wall Street.  The event involved many traders gathered on a Reddit forum facing off against large, established hedge funds, and it centered around stock for the video game retailer Gamestop.  The specifics of it will be discussed below, but in short, these online traders were able to drive the price of a Gamestop share from a low of below $3 earlier in the year to close to $400.  Although the movement has quieted down in recent days and the stock price has come back to Earth, the whole situation has awakened many to the idea that small, online traders have the ability to make waves on the stock market, much to the chagrin of the hedge funds.

The situation began on a Reddit forum known as r/wallstreetbets. This sub-reddit has been around for a few years now and is infamous for their often extremely risky investments. What occurred with the Gamestop stock price is known as a short squeeze. Many major hedge funds had shorts on Gamestop. In layman’s terms, a short is basically borrowing stock and making a bet against the company whose stock you are borrowing, making an assumption that the stock will decrease in value. When one takes a short, they are required to return that stock, but as the monetary value of said stocks are always changing, the stock may or may not be worth the same price when it was lent. Hedge funds take their shorts and sell the stocks immediately, expecting to be able to buy back the stocks at a much cheaper price later down the road, in turn making a big profit on the company’s decline.  However, if a short is taken and the stock’s price increases, the trader who took the short will lose money because they are required to return the stock and in order to do that, they would have to buy it back at a higher price than they sold it for; this is what happened to many short sellers in Gamestop’s case.

So why Gamestop?  Gamestop has been on the decline for a few years now.  As digital downloads, online retailers, and larger technology companies have gained traction among the video game community, the once-dominant Gamestop has seen a significant decline in sales.  As such, many of the top Wall Street firms saw the company as one that was on the way out, making it a popular choice among short sellers. It became so popular, in fact, that it reached a point where there were more shorts taken out than actual Gamestop stock.  Traders on r/wallstreetbets noticed this, and people began to buy up Gamestop’s stock knowing that these hedge funds would have to buy back the stock at some point.  The company’s stock price began to soar, and over the next few days, peaked at $347.51 on January 27th.  This created the squeeze; many hedge funds that had taken out lots of shorts on Gamestop lost big when they had to spend over $300/share to buy back stock that they had sold for double digits.  The next day, a major brokerage app called Robinhood, blocked the purchasing and selling of Gamestop stock, as well as the stock of other companies popular among the Reddit group, such as AMC and Blackberry. This decision was universally criticized among the public as well as politicians. From AOC to Ted Cruz, most people seemed to be in agreement that blocking the purchasing of certain stocks in order to benefit the uber-wealthy Wall Street establishment goes directly against the idea of a “free market,” although maybe we as a populace shouldn’t have been too surprised to see market officials doing what they could to bend the rules in favor of large hedge funds at the expense of the common person. Although Robinhood did later re-establish the ability to trade Gamestop stock, the stock wasn’t able to keep its momentum; as of Saturday night Gamestop’s stock price has dropped significantly to $63.77. However, this is still higher than where it was prior to the short squeeze due to the company’s previous struggles. 

The Gamestop movement may be essentially done at this point, but there are still many things to take away from this.  First is the attitude of these small traders; all you had to do was take one look at r/wallstreetbets during this saga and it was clear to see that to many of these people, it wasn’t as much about making money as it was about making a statement. A multitude of these traders hold personal animosity towards the Wall Street establishment for the 2008 financial crisis, manipulating markets to make the rich richer, or just the current status of the stock market. This vendetta resulted in a mindset along the lines of, “It doesn’t matter if we lose money, as long as they lose more”- many of these people were more than happy to potentially lose thousands as long as the people at the top lost billions. And they did. The other takeaway from this is that going forward, there seems to be change happening on Wall Street, and nothing is preventing this from happening again. This story has ignited interest in the stock market in many people, and many individuals now realize their power. For decades, the few people at the very top have controlled Wall Street completely, but there could be some change happening now- small traders know they have power and the ability to make noise, and we better believe that they will.