The Daily Telegraph
Ben Mezrich charts the four days when the ‘Gamestop saga’ left the financial markets in tatters
The suits and ties, ensconced in their glass-walled corner offices in the City and on Wall Street, never saw it coming. In January, the entire financial world was put on notice when Keith Gill, a 34-year-old, bandanna-wearing, chicken tender-eating, cat posterloving micro-trader from Massachusetts, started livestreaming from his basement and, over the course of four days, caused billions of dollars and pounds and euros of losses.
How he did it is perhaps even more remarkable – by toying with the stock price of a shopping mall video game retailer.
Bolstered by a mob of amateur investors gathering together on an obscure messaging board called Wallstreetbets, Gamestop’s stock ran from a few dollars a share to close to 500, making the company, for a brief moment, one of the most valuable in the world.
The remarkable rally marked a shift in the balance of power, from the staid, professional banking class to the micro-trader: regular people – single mothers, college kids, laid-off restaurant workers stuck in seemingly never-ending quarantines – who found a way to hijack a financial system that had formerly seemed rigged against them.
From the suits’ point of view, shorting Gamestop – betting against the company by borrowing shares, selling them at market price, with a promise to rebuy them in the future and pocket the difference – was one of the simplest and most obvious trades one could make. As a business, it had peaked in the 90s; though beloved to a generation of gamers who’d spent hours wandering shelves lined with Mario Bros paraphernalia and Pickle Rick dolls, the company had an atrocious balance sheet, a revolving door of leadership, and no real plan to move into the digital age of downloaded media and virtual communities. It was a company that, two years ago, was well on its way to becoming the next Blockbuster.
So it was no surprise that a handful of the world’s biggest hedge funds took aim at the company’s stock price – most notable among them Melvin
Capital, run by a brilliant and powerful former SAC trader named Gabe Plotkin – or that even as the price deflated to only a few dollars a share, the short interest skyrocketed, even reaching 140 per cent of the float. By the end of 2019, more shares of Gamestop had been sold short than actually existed, because the banking establishment had reached a nearly unanimous decision: Gamestop’s days were numbered.
But then came the dude with the bandanna, spouting his love for the company from his suburban basement. With a simple rallying cry – “We like the stock!” – millions of like-minded amateurs decided that, for once, the suits weren’t going to win. Having posted quietly in 2019, on the Reddit trading group Wallstreetbets, about his single $53,000 (£38,000) investment in Gamestop, his stock went on to hit $48 million (£34.7m) in value earlier this year.
A bubbling anger that could be traced back to the worldwide financial crash of 2008 finally found a voice in a disparate online mob, who suddenly realised that a million micro-traders with a singular focus could overpower even the biggest of hedge funds. And it wasn’t just the binding power of social media spurring them forward; for the first time in history, Main Street had at its disposal the same financial instruments as its moneyed counterpart.
Robinhood – a Silicon Valley fintech unicorn founded in 2013 by maths prodigies Vladimir Tenev and Baiju Bhatt with the goal of “democratising finance” by handing the tools of expert traders to anyone with a smartphone – had fast overtaken the more staid online brokerages by offering zero-fee, no-balance trading, along with a slick interface that was both easy to use and immensely fun. Buy your first stock, and confetti flowed across your screen; bright colours, plucky sounds and vibrating feedback made investing feel like a video game, the perfect complement to a movement that revolved around propping up a beloved console retailer like Gamestop.
The resulting short squeeze – a phenomenon caused by short-sellers rushing for the exits as a stock price spirals upward, trying to rebuy their borrowed shares, which only serves to push the price higher and higher – shone a spotlight on the power of the Wallstreetbets stock trading discussion group on Reddit. Gamestop Corporation (GME) ran from a low of a few dollars a share to nearly 500. The rise was compounded by a single tweet – “Gamestonked!” – after market-close on Jan 26 from Elon Musk, the ultimate anti-short internet gadfly.
And it was only when Robinhood, flailing after being served with a collateral call from federal clearing agencies to the tune of $3.7billion (£2.6bn), froze the buying power of its users, that the squeeze at least temporarily ended, and the price descended to a still fairly spectacular and steady state, around the $200-a-share mark.
Wherever the price of Gamestop’s stock finally settles, the moment continues to resonate: those four days in January proved that the concept of “value” has changed. The price of an asset is no longer tethered to its fundamentals. Things – stocks, cryptocurrencies, tokens, whatever – are worth whatever we, as a group, decide they are worth.
The rise of GME, the ultimate meme stock, was not an isolated event. AMC and Blackberry Doge have both risen to frightening heights based on Reddit posts, rumours and anti-wall Street sentiment. The founding principle that there is order or rationality in the market has been proved wrong again and again – and, in the end, no investment, no matter how well researched and thought out, can be considered safe.
The events surrounding the Gamestop saga have put Wall Street and the City on notice. Now that micro-traders realise the power beneath their fingertips, financial markets must learn to adapt to a new reality; a new balance of power that, at the touch of a screen, can favour emotion over fundamentals.
The principle that there is order in the market has been proved wrong