The battle of GameStop

Elon Musk sounded pretty pissed off. The American multi-billionaire was making his debut on Clubhouse, a new invitation-only chat app, where users can broadcast conversations and interact with their audience. On 1st February 2021 Musk held court on a range of issues from the prospect of colonising Mars to how one of his companies was experimenting with human brain implants, currently being tested on pigs. But then he invited Vladimir Tenev on to his feed for an impromptu interview, and the mood changed.

Tenev is the CEO of Robinhood, a stock-trading company and app that has revolutionised the industry by offering commission-free trading. As its name suggests, Robinhood is aimed at empowering the little guy – individuals trading a few hundred bucks, or whatever they can afford – against the big sharks of Wall Street.

The app is simple, colourful and easy to use, like Uber or Bet365. But a few days before Musk called Tenev, Robinhood had suspended trading in a handful of shares that were unexpectedly surging, including Covid-threatened cinema chain AMC and struggling smartphone company BlackBerry.

GameStop had been the magical place people went to buy the latest games and trade in old ones”

One company had surged faster and further than the rest. US video game retailer GameStop had fallen on hard times, yet its share price had soared by more than 18,000 percent in the last year. The unlikely boom was threatening to bankrupt some of Wall Street’s biggest institutional investors, who had bet on the stock’s failure. Robinhood’s users, and Musk, were furious that trading in GameStop stock had been suspended, with the stock platform appearing to side with Wall Street.

“What happened last week?” Musk said, drilling into a nervous-sounding Tenev. “Why can’t people buy GameStop shares? The people demand an answer and they want to know the details and the truth.”

Musk, who has a personal fortune of around $160 billion, is a regular on social media, where he is a prickly but seemingly authentic presence. His tweets have the power to add or wipe millions of dollars from a company’s valuation, including his own. In 2018, the US Securities and Exchange Commission ordered an executive to approve Musk’s tweets relating to Tesla before he sent them. The New York Times called him a “bomb-throwing troll”. On 26th January, Musk threw one of his biggest bombs yet: a single word tweet to his 60 million followers that sent US financial markets into a frenzy: “GameStonk!!”

The tweet linked to a page on online forum Reddit called r/wallstreetbets. WallStreetBets had two million users at the time, who tend to share investment advice in the form of memes, GIFs and internet slang. For months, the forum had broiled with hostility against US hedge funds betting that GameStop would go bust. So its users organised an uprising. Posters urged each other to take GameStop shares “to the moon”, forcing the price up – usually through the Robinhood app.

It was David versus Goliath – individual retail investors worth relative peanuts up against the Masters of the Universe, the term Tom Wolfe coined for New York traders in his 1980s novel The Bonfire of the Vanities. If the price of GameStop stock rose, the Masters of the Universe lost. Musk’s tweet was seen as an endorsement of both the GameStop rally and the WallStreetBets insurgency. In its immediate aftermath, the price of GameStop shares rose 157 percent. Wall Street was taking a beating.

For the Redditors, this was the single greatest act of grassroots investor activism in the history of the stock market. GameStop was disparagingly labelled a ‘meme stock’ by institutional investors and the mainstream press – essentially a company whose share price had rallied simply because armchair investors organising on social media had forced its stock to go viral, whether on principle, for profit or just for the #LOLZ. But when Robinhood announced it was putting a freeze on buying meme stocks, WallStreetBets smelt a rat. So did Elon Musk.

“Did you sell your clients down the river, or did you have no choice?” pressed Musk. “And if you had no choice, that’s understandable. But then we have to find out why you had no choice and who are these people that are saying you have no choice?”

Tenev took a deep breath.

Video games
Before GameStop became a meme stock, the company had looked like it was dying. The video game retailer had been an iconic brand for the first generation of American gamers. Ever since 1984, GameStop had been the magical place they went to buy the latest games, as well as to trade in their old ones. But, today, games for high-powered consoles like the PlayStation or Xbox can be downloaded directly or delivered to your door. To the hedge funds, GameStop appeared to be a relic, destined to go the way of video rental business Blockbuster, which once raked in $6 billion of revenue a year but collapsed and went bankrupt in 2010. Just as streaming had killed the video star, ever-faster internet speeds appeared to be killing GameStop.

In 2019, GameStop reported the biggest yearly loss in its history: $673 million. By April 2020, with the Covid-19 pandemic putting further stress on a business that relied on people physically visiting stores, traders were selling GameStop shares hand over fist. Shares were trading at $2.57, the lowest they’d ever been. Hedge funds and institutional investors from big Wall Street banks believed the stock had lower to go, and started short-selling GameStop stock, hoping to profit from further losses.

So how does short selling work? “You borrow shares [from a broker], sell them and then, you hope, buy them back at a lower price. So they make money because the stock goes down,” explains Michael Pachter, a video game industry analyst at investment firm Wedbush Securities. “The shorts [traders who short a stock] were convinced that GameStop was going away. It’s Blockbuster. It’s RadioShack [which filed for bankruptcy protection in 2015]. So they shorted heavily.” Shorting a stock is a popular but controversial financial move because it means being rewarded for a company’s failure. Some investors saw GameStop as ripe for being shorted. On Reddit, WallStreetBets saw things differently. Several high-profile posters believed GameStop was undervalued – a viable business in a video games industry that was worth more than $150 billion in 2019, and had boomed during the pandemic. They believed the company was worth saving.

Pachter thought the hedge funds had got their numbers wrong, too. “New games have value as trade-in for used games,” he says. “Customers feel like a physical game is a $20 bill. But a digital copy is a $0 bill. A physical game has intrinsic value. So GameStop actually provides a valuable service. The people who cared, cared.” When rumours that the new PlayStation 5 console wouldn’t have a disc drive proved to be false, Pachter knew GameStop had a future. “As long as they make physical discs, GameStop will survive because people will buy them to trade them in,” he says. “The shorts didn’t understand that.”

There was another force at play, above profit. GameStop was a sacred place for many in the gaming community. It was part of the same cultural ecosystem as Reddit, and Wall Street was trying to dismember it. Users began buying stock and taking the price in the opposite direction – going long – forcing what is known as a short squeeze. If they bought the stock at $100 and then the stock went up to, say, $120, the hedge funds were now on the hook for the extra $20. In theory, their losses could be limitless. “It was a question of who was going to win. Is the swarm going to win?” says Ghulam Sorwar, professor of finance at Keele Business School. “If you have millions of people with $50, even a hedge fund can’t cope with that.”

The meming of life
I am cheering so fucking hard for the retail army waging holy war against the old guard. We have been fucked for so long by Wall Street, it is such a glorious day to see Wall Street finally being fucked back by Main Street
– /U/poobie123

WallStreetBets was founded in January 2012 by Jaime Rogozinski, an American IT consultant and part-time trader in his early 30s, who had become bored with the staid world of finance. Retail investing, share-trading undertaken by small-time individuals, was dull and overly complicated. Rogozinski wanted to take affordable risks, and found it difficult to discuss and share information with like-minded people on existing sites. So he set up his own forum on Reddit. He created a subreddit called r/wallstreetbets which he ran with a team of moderators who kept the conversation from going off the rails. It soon became a place where amateurs and more sophisticated investors would go not just to brag about their winnings but to give advice on riskier trades, creating a community where the Redditors revelled in each other’s successes and laughed at their losses.

The shorts were convinced that GameStop was going away. It’s Blockbuster. It’s Radio Shack. So they shorted heavily”

The forum is wrapped up in its own humour and politically incorrect lexicon. Users refer to themselves as “degenerates”. They have “diamond hands” if they hold on to stock no matter what, and “toilet paper hands” if they sell at the first sign of trouble. Popular shares are “stonks”, and bad decisions are described as “$Ropes”. Everyone shares one simple motto: “YOLO”. In other words, take risks; invest as if you only live once.

WallStreetBets was a fringe subreddit until 2019 when Charles Schwab, a brokerage firm that acted as the middle-man between buyers and sellers, announced it would no longer charge commission on trades. Armchair investors flocked to WallStreetBets for tips in a new commission-free era, which came to be dominated by Robinhood. In the same year one WallStreetBets user, /u/delaneydi, posted his “GameStop Investment Thesis”, the first mention of GameStop as an investment opportunity on the forum. Initially, it was given short shrift by fellow users.

Yet by the start of 2021 GameStop had improved its position significantly. Ryan Cohen, who had built the online pet retailer Chewy before selling it for $3.35 billion, invested heavily and joined the board. His backing, coupled with a surge in demand for computer games and an unexpected global shortage of microchips used in consoles saw market conditions change in GameStop’s favour. GameStop rose to $17.25 a share. But the hedge funds still smelled blood. Andrew Left, an activist investor whose company Citron Research is famed for reports that highlight overvalued companies ripe to be shorted, damned GameStop’s prospects.

This set WallStreetBets on fire. Another member called /u/DeepFuckingValue had spotted that more GameStop shares were shorted than were available to trade – which meant that only a small rise in value was needed to trigger a short squeeze. “And the dude was absolutely spot on,” says Pachter. Users bought more GameStop stock, sensing that the shorts had overexposed themselves. It was a chance to give Wall Street a bloody nose. The subreddit was full of stories from Redditors whose working-class families had lost their shirts in the 2008 financial crisis. This was, in part, revenge. As /u/benaffleks wrote: “This is personal, for all of us. I’ve never seen anything like what’s happening with $GME [GameStop] before, and I don’t think I’ll ever see anything like this. This is a big moment. A tug of war between tradition and the future. Godspeed, warriors. Show no mercy. There is no turning back now.”

After Musk’s “GameStonk!!” tweet, shares rocketed to $347.51. At one point the value of GameStop’s stock briefly touched $483, as BlackBerry and AMC also saw huge increases. Hedge funds, meanwhile, were losing billions of dollars.

David had floored Goliath. Small retail investors weren’t “placing bets on a sports game. They are placing bets on a market in a way that is affecting the odds of the outcome,” Rogozinski told CNN. “It is so easy, readily available, gamified on people’s cell phones. They are instantly able to get in there, participate and start using these tools to exploit the asymmetry of money. A lot of people, little money, but they are forcing the hands of the big guys.” And then Robinhood pulled the plug.

Under the hood
Tenev, the CEO of Robinhood, didn’t do a great job of placating Musk during their Clubhouse chat, even if he appeared to have a good answer as to why he suspended Robinhood users from buying GameStop shares. “Thursday morning, at 3.30am Pacific time, our operations team gets a file from the NSCC,” said Tenev.

The National Securities Clearing Corporation is an industry body that settles and clears trades between buyers and sellers. Robinhood, like other companies, have to put up a cash deposit to them to cover their trades. “They gave us a file with a deposit request of $3 billion.”  This, Tenev explained, was ten times more than it has ever put up before, and $1 billion more than the company has ever raised in venture capital. Eventually the NSCC lowered its demands to $700 million, but only after Robinhood promised it would prevent users from buying GameStop and other meme stocks.

We knew it was a bad deal for customers. Robinhood stands for democratising access to stocks… but we had no choice”

“We knew it was a bad deal for customers,” Tenev admitted. “Robinhood stands for democratising access to stocks… but we had no choice.” Musk still wasn’t impressed – not surprising given that he has long fought battles with hedge funds and investors trying to short Tesla stock, and has described short-selling as a “scam”. He also raised the issue that the NSCC is an industry body controlled by its members, some of whom had been hit hard by the GameStop rally. Surely there was a potential conflict of interest? Tenev dismissed that as a “conspiracy theory”.

The suspension of sales of GameStop shares on Robinhood had an immediate effect on GameStop’s price, almost halving it. Individual users lost thousands. It wasn’t just Robinhood users or Musk who were pissed off. The move briefly united a politically polarised America. The Democratic congresswoman Alexandria Ocasio-Cortez tweeted that the move to restrict people buying GameStop shares was “Unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” Republican congressman Ted Cruz tweeted his agreement.

A month later, congressional hearings took place with the working title ‘Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.’ Tenev gave evidence, as did Keith Gill, aka /u/DeepFuckingValue, a financial analyst who goes by the name RoaringKitty on Twitter and was a high-profile early mover on GameStop.

“It is true my investment in that company multiplied in value many times,” Gill told Congress by video link, batting off suggestions that he artificially inflated the stock for profit. A group of investors had already launched a federal lawsuit against him claiming just that. “A few things I am not. I am not a cat,” he said, referring to his RoaringKitty avatar. “I am not an institutional investor. Nor am I a hedge fund. I do not have clients and do not provide personalised investment advice for fees or commissions. I am just an individual whose investment in GameStop… [was] based on my own research and analysis.”

Weapon of choice
In the days following Robinhood’s meme stock ban GameStop’s share price remained volatile. It surged once again on the news that GameStop’s CFO had been forced out by Ryan Cohen, who many on WallStreetBets viewed favourably as GameStop’s potential saviour. On 25th February prices passed $100 again. The rise confounded analysts who had predicted that the “meme-stock” revolution would fizzle out.

Over the following months GME’s share price rose further although it never regained its January 2021 peak. Mainstream analysts continued to warn that the kind of investor activism seen with GameStop would lead to thousands of ordinary people being bankrupted when the bubble bursts.

Analysts warned of thousands of people being bankrupted when the bubble bursts”

“This whole bubble popping is a boomer mentality,” Rogozinski told CNN, highlighting the generational divide between younger WallStreetBets investors shaking things up on the outside, and the “baby boomer” generation – encapsulated by the big institutional investors – that has reaped most of the economic benefits of the past 40 years. Regardless, Michael Pachter thinks that many might still be overexposed. “If they’re playing GameStop the way normal people play a lottery ticket, and they buy one [ticket], who cares?” he says. “If they’re mortgaging their home and not feeding their children to invest in GameStop? I think that’s irresponsible.”

At least one film is being made about WallStreetBets, which now has more than ten million members, but there has been disquiet on the forum. Rogozinski himself was removed as a moderator just before the GameStop run for “monetizing the subreddit”, according to one post that explained why he was removed. Rogozinski had written a book called WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials. Rogozinski claimed in the Wall Street Journal that he was kicked out after clashing with “a handful of mods who were straight up white supremacists”. He has since sold his life rights to a producer.

There was also a coup attempt on WallStreetBets in February 2021, when older moderators kicked out newer moderators, allegedly so they too could cash in on a film rights feeding frenzy. One WallStreetBets contributor politely declined to be interviewed for this piece because they had “signed an exclusivity agreement” and were “prohibited from sharing my recollection of events regarding GameStop”.

And Robinhood? On 1st July it made an IPO filing ahead of plans to float on the stock market. It revealed that, on top of a congressional inquiry, the company faces dozens of lawsuits and investigations by regulators, state attorney generals and the US Department of Justice. It showed that Tenev’s mobile phone was seized by the US attorney’s office for the Northern District of California investigating Robinhood’s decision to suspend trading in meme stocks. Yet the IPO is likely to raise hundreds of millions of dollars regardless.

Meme-stocks have gradually been falling since January 2021 but are still massively up on their pre-rally price. By early July, GameStop shares were below $200. “It’s similar to a pyramid scheme, where the people who got in early made money,” says Pachter. “The people who bought in at $5 clearly made money. The people who bought at $200? The jury’s still out. Anybody who shorted it [significantly] below $200 is dead…” But another meme stock rally might only be a few Reddit posts away. “My gut feeling is that these things are going to happen again,” says Professor Sorwar. “I think this has proved you now have another element in the trading game, which you really can’t control. It’s a weapon.”

Posted on Friday, January 21st, 2022 - Categories: #42 - Jan-Mar 2021, From the archive, Long reads.