In January 2021, masses of retail investors coordinated on Reddit to cause a surge in the GameStop share price, completing the first successful financial collective action.
As the role of retail investors is expected to grow in the future, these findings shed light on how these crowds can coordinate on social media to impact the financial world.
At the start of 2021, masses of Redditors invested in video game retailer GameStop to cause a surge in the company’s share price, and international researchers say all it took was a small number of committed people to start the cascade.
How early investors decreased when the social identity of the broader Reddit community grew
The GameStop stock on the New York Stock Exchange witnessed a classic ‘short squeeze‘ in January 2021. As the price rose quickly, traders who had bet that it would fall (i.e., those who had ‘shorted’ it) were driven to buy it in order to avoid even greater losses, encouraging the price increase even further.
Professional hedge funds, like Melvin Capital Management, were hit hard by the squeeze, losing 53 percent of their investments for a total loss of 4.5 billion dollars.
Users of the subreddit r/wallstreetbets (WSB), a famous Internet community on the social news website Reddit, were the ones who started the short squeeze. They managed to turn online conversations into a well-coordinated financial operation.
The media, experts, and financial authorities all paid close attention to these events. To investigate the GameStop squeeze, US Treasury Secretary Janet Yellen summoned a meeting of financial authorities, including the presidents of the Securities and Exchange Commission, Federal Reserve, Federal Reserve Bank of New York, and the Commodity Futures Trading Commission. Cindicator Capital, a fund specializing in digital assets, recently posted a job listing for a sentiment trader (i.e., a trader seeking an edge by reading signals about how other investors feel about a particular stock) with three years of active trading experience and more than a year of membership on WallStreetBets with a karma score of more than 1000.
Finally, the US Congress’s House Committee on Financial Services scheduled a hearing titled “Game Stopped?” Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide to analyze the events.
They called as a witness Reddit user Keith Gill, also known as u/DeepFuckingValue on WSB, who was instrumental in the collective action’s inception. At the hearing, committee members voiced worry about the gamification of investment, which is encouraged by trading platforms like Robinhood, which is popular among ordinary investors because of its low commissions. Despite the significance of defining this system in order to assess risks and develop rules, it is unclear how the coordination on WSB came about in the first place.
The team looked at discussions on WSB from November 27, 2020 to February 3, 2021 to see how they converted into collective action before and during the squeeze, which began on January 22 and lasted until February 2.
Authors investigated whether committed users on WSB played a role in triggering the collective action, based on recent theoretical and experimental evidence that minorities of committed individuals can mobilize large fractions of a population even when they are extremely small.
The GameStop saga
GameStop (GME) is a video game store based in the United States that was at the center of the January 2021 short squeeze.
In 2019, Reddit user u/DeepFuckingValue took a long position on GME, meaning he purchased shares of the company’s stock, and began posting regular updates in WSB.
On October 27, 2020, Reddit user u/Stonksflyingup posted a video explaining how Melvin Capital, a hedge fund, may leverage a short position to cause a short squeeze. GME unveiled a new Board of Directors on January 11, 2021, which included e-commerce specialists.
This move was widely viewed as beneficial to the corporation, and it caused some initial discussion on WSB. Citron Research (an investment website focusing on shorting stocks) predicted that GME’s stock price would drop sharply on January 19.
Users of WSB started the brief squeeze on January 22. The stock price had soared by more than 600 percent by January 26, and trading had been interrupted many times owing to its extraordinary volatility.
Elon Musk, the billionaire businessman, tweeted ‘Gamestonk!!’ with a link to WSB on the same day. GME attained its all-time intraday high price on January 28, and more than 1 million of its shares were judged failed-to-deliver, ensuring the squeeze’s success.
A failure to deliver is when a party is unable to deliver a tradeable asset or fulfill a contractual commitment; a common example is when shares are not delivered as part of a short transaction.
On January 28, Robinhood, a financial services business whose trading app was popular among WSB users, froze all GME stock purchases. The stock price plummeted on the first and second days of February.
By the end of January 2021, Melvin Capital, which had been shorting GameStop a lot, said that it had covered its short position in the stock (i.e. closed it by buying the underlying stock). As a result, it has lost 30% of its value since the beginning of 2021 and has lost 53% of its assets, totaling more than $4 billion USD.
The r/wallstreeetbets ecosystem
Reddit is a public discussion website divided into a rising number of autonomous subreddits covering a wide range of topics. Users can create nested conversation threads by submitting new posts to any subreddit and adding comments to existing posts or comments.
r/wallstreeetbets (WSB), a Reddit forum for investors and traders that self-describes as “Like 4chan with a Bloomberg terminal,” is one such subreddit. It is devoted to high-risk trades employing derivative financial products (e.g., options and futures, which are frequently leveraged), and is hence aimed towards intermediate to advanced retail traders rather than novice investors.
It was founded in 2012 and has over 10 million users as of June 2021 (self-described ‘degenerates,’ but also known as ‘autists’, ‘retards’ and ‘apes’ depending on the type of knowledge posted on the subreddit).
The WSB community is known for its profane and juvenile humour, and it has a distinct identity reinforced by the widespread use of jargon (for example, ‘stonks’ for stocks, ‘tendies’ for profits, and ‘diamond hands’ or ‘paper hands’ for people who hold stocks through turbulent times or sell them at the first loss, respectively).
This forum’s popularity has risen in recent years (particularly since 2017), probably as a result of the widespread use of no-commission brokers and mobile online trading platforms like robinhood.com.
Although the forum’s themes are diverse, there are certain general patterns of behavior that are also documented in the FAQ. A user can attach a category tag called ‘flair’ to a post when submitting it, which serves as an indication of its content.
Table below lists the permitted flairs as well as a brief description of each. Flares are taken seriously by the community, and they are severely enforced (for example, the FAQ states that misuse major flairs might result in a permanent ban). As a result, it’s not uncommon to see screenshots showing an open position on a dangerous bet marked with a YOLO flair, mixed with outlandishly funny posts and memes.
The subreddit’s debate follows a simple post-comment dynamic, in which each post creates its own multi-level comment tree. Each engagement, whether it’s a post or a comment, can get ‘upvotes’ and ‘downvotes.’
While anonymously expressing one’s position through ‘upvoting’ or ‘downvoting’ is a common ‘slacktivist’ technique, other users can also opt to ‘award’ rewards to more emphatically recognize a post or comment.
In this study, they found that prolonged commitment activity reliably preceded the increase in GameStop share returns, whereas simple measurements of public interest in the phenomena were unable to forecast the increase in share values.
They also discovered that, despite the constant influx of new users into the group, the success of the squeeze operation impacted the growth of the social identity of WSB participants.
Finally, they found that early committers maintain a dominant position in the debate network, as rebuilt by WSB posts and comments, in the weeks leading up to the stock price increase, whereas more peripheral users only exhibit commitment in the final stages of the tale.
They suggest we’ll probably see more of these ‘retail investors’ in the future, and it is likely that social media will again affect the financial world.
Image Credit: Getty
You were reading: GameStop saga: How Redditors rocked Wall Street