Reddit Thread Redemption: How the Web beat Wall Street
When the $hort hits the fan.
You know where this is going... but here's a quick recap anyway.
Long story: shorts.
On January 14, 2021, the stock value of GameStop ($GME) – video game seller, and one of the last bastions of America's dying brick-and-mortar shopping mall– increased by 27% in one day.
Mad Money's Jim Cramer (and former hedge fund manager) was one of the first to report the surge, calling it "open plotting" by Redditors,"succeeding beyond their wildest dreams."
While visions of sugar-plums danced in /r/WallStreetBets' heads, short-sellers instead woke up to nightmares; Hedge fund Melvin Capital was short squeezed so badly that it lost 53% of its value.
On January 28th, as Gamestop shares rose 400%, Wall Street’s three major stock benchmarks posted their worst weekly performances since October of 2020.
Amidst last Thursday's chaos, stock-trading app Robinhood, temporarily limited purchases of certain meme stonks (including $GME) on their platform, resulting in the loss of millions of dollars for Robinhood users unable to make trades.
As a result of playing Sheriff of Nottingham for the day, Robinhood immediately drew the ire of Washington–and lawsuits from 30 other parties in 10 states in total.
This week, Wonder takes you back to 2005 (long before Sherwood Forest met Wall Street) and untangles the web of Reddit's most ambitious community.
Source: S3 Partners via RECODE by Vox
Reddit between the lines.
15 years before activist investors forced Wall Street to literally eat their own shorts, Reddit was founded in the same way as any other chaos-inducing social network: in a dorm room. This time on the University of Virginia campus in Charlottesville by students Steve Huffman, Aaron Swartz and Mr. Serena Williams.
Reddit is not an online community, it is millions of online communities–or Subreddits– serving as a virtual bulletin board for aggregating, rating and discussing content on the web.
Reddit's moniker as the "Front Page of the Internet" is not exactly hyperbole: As of February 2021, Reddit is the 7th most visited site in the US and the 18th worldwide according to Alexa.
So how did we get from upvoting to uprising?
In October 2006, Condé Nast Publications acquired Reddit. At this time, only a few subreddits existed, the first being /r/nsfw, followed by /r/programming and /r/politics, as a means to segregate certain types of content from dominating the front page.
Condé Nast soon saw the power of subreddits as a means to sell targeted ads, and subreddits become a public fixture of the platform.
/r/wallstreetbets (WSB) was created by Jaime Rogozinski in 2012, who at the time was working as an IT consultant at a bank in Washington, DC.
Rogozinski's subreddit was niche and didn't cross the 100,000-subscriber milestone until 2017. By April 2019, /r/wallstreetbets became the #2 ranked subreddit in terms of comments per day.
In March 2020, WSB finally crossed the 1 million-member mark due to many people being stuck at home from pandemic lockdowns and hurting for cash. In that same month, Robinhood also saw a spike in new activity, crossing the 2 million user mark.
Almost a year later, by the time Redditors were wreaking havoc on Wall Street, the subreddit grew to 73 million page views and 10.5 million unique visitors in just 24 hours.
To put this into perspective, Reddit as a whole (across all of it's /subreddit communities) had only 52 million daily active users in October 2020.
Source: /r/DataIsBeautiful (subreddit)
A Web of Buys.
While Founder Rogozinski saw the early potential of his Frankenstock's creation, he lost out on the chance to lead the revolution he once started.
After publishing his prophetic book last January, WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials, he was barred from moderating WSB for breaking Reddit’s rules prohibiting moderators of a community from monetizing off the group.
In the spring of 2020, chatter about doing a short squeeze with GameStop stocks grew on /r/Wallstreetbets:
To short stocks, short-sellers have to borrow stocks, and brokers are not allowed to lend shares for short positions without the owner's permission. These new actions by WSB caused shares to increase by up to 26% over the next few days, even though they eventually stabilized.
Ryan Cohen, former CEO of subscription dog box Chewy, encouraged GameStop to be the "Amazon of gaming" earning him a GameStop board seat, and interest in the stock began to rise exponentially.
Last summer, Famed investor Michael Burry of Scion Asset Management and alleged Christian Bale lookalike (the actor portrayed him in the 2015 film, The Big Short) decided to go long on Gamestop shares.
His firm urging the company to buy back $238 million in shares, as Seeking Alpha warned investors against shorting the stock.
At the same time, Keith Gill (aka WSB member DeepF***ingValue) started showing off his gains due to Burry's bullishness on the stock. Gill had turned his $54,000 investment into $48 million at GameStop's peak.
By the end of 2020, it was apparent WSB members were becoming more committed to the idea.
One post entitled "Bankrupting Institutional Investors for Dummies, ft GameStop" urged its members in the weeks leading up to January 14th, 2021 to remember the WSB code of conduct: "NEVER SELL, NEVER SURRENDER."
By the week of January 18-22, Redditors were buying shares as a meme. Citron Research founder Andrew Left tweeted that the stock would soon plummet to $20 (At the time, had by then climbed to $41.)
Left's attempt to poke the bear did quite the opposite for Reddit's band of amateur investors: a bull market impact. Vengeful Redditors doubled down, driving the stock up by as much as 78% on January 22, ending the day at $65.
By the 27th of January, investors were turning their attention to $AMC. By opening, the stock rose more than 250%, leading the charge to target other “meme" (or, “YOLO”) stocks such as Nokia ($NOK), Blackberry ($BB), and Bed Bath & Beyond ($BBBY.)
While actively plummeting at market close as of Feb 4th, 2021, Gamestop stock ($GMC) is trading at $53.50– Still more than Ford ($F), $GE, and AT&T ($T) combined.
To read on about Wall Street's pushback, How Robin Hood's attempt to stop the bleeding only led to lawsuits, and an ABC list of all the industry terms you'll need to follow this odyssey – check out our research here.
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