Redditors successfully ‘Occupy Wall Street’ – or do they?

Photo of GameStop
Mike Mozart/Creative Commons

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In September 2011, the Occupy Wall Street movement took the United States by storm as protestors “occupied” different physical locations — most notably New York’s Financial District — throughout the nation for months as a form of protest against income inequality. Nearly a decade later, we’re learning of the story of GameStop, which proves that the 99% could actually fight the 1% by harnessing the power of social media. Well, kind of. 

Despite all the 2011 occupants’ cries against the greed of the top 1%, substantive change was made virtually impossible by the movement’s lack of organization and leadership. Occupy’s total absence of infrastructure made support (financial or otherwise) difficult and made the movement’s actual goals murky at best.

The legacy of the movement lies not with specific policy change but rather in popularizing a broader movement in opposition to the extremely wealthy. The Occupy movement is at least partially responsible for shifting political rhetoric toward discussions of $15 minimum wage and wealth taxes, and for kickstarting the presidential campaigns of Senators Elizabeth Warren and Bernie Sanders.

Most recently, the sentiments that inspired the Occupy movement have seemingly relocated from a physical plane of protests, sit-ins and poster boards to the virtual plane of the r/wallstreetbets subreddit. Though the subreddit has been around since 2012, it gained notoriety in January 2021 as the propellant behind an explosion in the price of GameStop stock, an explosion that uniquely hurt some notable hedge funds. 

Blindsided by the GameStop fiasco, Melvin Capital, a hedge fund that managed $12.5 billion at the beginning of the year, lost 53% on its January investment and saw the money it manages plummet to $5.25 billion. Though the company was aided by a $2.75 billion injection from both Citadel LLC and Point72 Asset Managementa separate hedge fund which lost 15% itself during what Bloomberg dubbed the “Reddit revolution” — the losses are absolutely staggering. Other hedge funds like D1 Capital Partners took losses of 20% in the fallout.

But how did this happen?

Many of these large hedge funds shorted GameStop stock right as the Redditors, a group of mostly young men in either their teens or twenties, grew in enthusiasm about the promise of GameStop stock.

In order to understand exactly what that means, imagine that your friend lends you a jacket that is currently worth $20 for one month. If you believe that jacket will be worth $5 a week from now, then you can sell that jacket for $20 now, and buy it back for $5 in a week’s time. This way, you can return the jacket to your friend and make $15 during that month. But, if you sell the jacket for $20 and a week later the jacket is suddenly worth $400, then you’re losing $380 because you have to buy back the jacket at its current price in order to return it to your friend.

The hedge funds sold the stock at around $20 per share, expecting to buy it back at a cheaper price. 

But r/wallstreetbets had other plans. CNBC reports that GameStop was the most-shorted stock on the market at the time. The redditors saw that large hedge funds were shorting a huge amount of GameStop stock and rallied their troops to “short squeeze” the stock.  If enough of them bought GameStop stock, the hedge funds would be forced to buy it back at a high price. And it worked — the stock became so popular among redditors that hedge funds were forced to buy it back at prices as high as $483 per share. Only, hedge funds didn’t sell just one share, they sold thousands of them. GameStop accounted for nearly 20% of an $80 billion net loss for short sellers in the month of January. For comparison, the amount short sellers lost in January 2021 alone is already about a third of what was lost the entirety of 2020.

The redditors saw that large hedge funds were shorting a huge amount of GameStop stock and rallied their troops to “short squeeze” the stock.

As the impact that redditors were having on these massive hedge funds became increasingly obvious, the reasoning behind GameStop’s momentum changed entirely. Initially, it seems redditors were genuinely enthusiastic about GameStop’s potential, especially since the company evoked a nostalgic sense in the mostly young, mostly male day traders that populated the subreddit. However, as GameStop’s meteoric rise became a national story, many bought in to support what was billed as a common man’s fight against Wall Street and hedge funds.

But, in order to keep screwing over these hedge funds, the redditors needed two key trends to continue.

First, enthusiasm over GameStop stock had to keep growing in order for the stock price to keep going up, meaning people had to keep buying GameStop stock even when it was already at a price that experts believed to be unsustainable. And while it looked like this might actually happen for a short period in January, GameStop stock came crashing down by the end of the month, falling from $483 per share to $60 per share after the first week of February. One major blow to the continued growth of GameStop was the internal turmoil of one of the major stock trading apps: Robinhood. A significant portion of the GameStop buyers were using Robinhood to drive stock prices up, but investment had accelerated so rapidly that Robinhood simply did not have enough money to keep up, prompting the company to restrict trades on GameStop and other stocks.

Second, those that had bought GameStop at lower prices had to refuse to sell their stock for the squeeze to work, even despite the enormous profits that some stood to make from buying the stock low and selling it high.

While it is true that some hedge funds lost enormous sums of money, it is equally true that many among the ranks of the small-time investors lost devastating fractions of their personal wealth.

This is where the ghosts of Occupy’s past came back to haunt those now entrenched in the GameStop saga. The movement’s leaderless nature practically guaranteed that stockholders would not act in unison to bleed out hedge funds, as seemed to be the goal of many late investors. Instead, many of the early investors cashed out, plummeting the stock’s value and destroying the often inexperienced small-time investors.

While it is true that some hedge funds lost enormous sums of money, it is equally true that many among the ranks of the small-time investors lost devastating fractions of their personal wealth. Caught up in the social media fueled mania, people used their rent money to buy GameStop stock in some instances, making the losses suffered among smaller investors all the more painful.

It’s not even entirely true that the common man was the biggest beneficiary of this entire debacle. Though the most fortunate among the redditors made millions, the real winner was the asset manager BlackRock. BlackRock had the largest shares of GameStop stock and has made billions in the past few weeks.

The reality is that taking down hedge funds by day trading is a lot like trying to take down a casino by gambling big: The house always wins. It has been proven time and time again that day traders lose money to bigger financial institutions that have more capital, resources and information.

If those who invested in GameStop truly want a lasting fight against the ultra-wealthy, they will find it nearly impossible to do so through the New York Stock Exchange and NASDAQ. Instead, their sentiments will have to prove powerful enough to influence those on Capitol Hill, a legacy that Wall Street’s 2011 occupants proudly claim. The question is whether Washington, D.C., will view GameStop as the new Occupy or simply a passing moment of Reddit rebellion.

Contact Lucas Yen at [email protected].