USA TODAY International Edition
GameStop buying frenzy mirrors Trump’s ascent
Financial ‘ revolution’ was stoked by social media, power of group thinking
WASHINGTON – You say you want a revolution?
Then look at what’s happening on Wall Street.
Small investors banding together on social media are taking on big investment firms by running up the stock price of GameStop, a struggling video game retailer whose shares were trading at around $ 4 at the start of the coronavirus pandemic. By Thursday, the stock price had surged to more than $ 480 a share before leveling off and closing at $ 193.
“We are witnessing the French Revolution of Finance,” declared Anthony Scaramucci, a financier who served as President Donald Trump’s White House communications director for 11 days in 2017.
Analysts believe Scaramucci, aka “The Mooch,” is right about the revolution, even if he cites the wrong country.
They see parallels between what’s taking place on Wall Street and the streak of populism that powered Trump’s rise to political power and fueled a pro- Trump mob that stormed the U. S. Capitol last month in a failed bid to overturn his election loss to Joe Biden.
“We are starting to realize that traditional rules don’t necessarily have to matter,” said Frank Murtha, co- founder of MarketPsych LLC, a behavioral finance consulting firm.
To be sure, there's no comparison between Reddit users making legal trades and the deadly insurrection at the Capitol.
But experts said both events illustrate the power of social media and crowd psychology.
What happened on Wall Street and
in Washington “speaks to a larger disenchantment and sense of unfairness that is going on in society,” Murtha said. “This is merely a natural move by these guys that, I think, is largely an attempt to strike back at what they consider to be unfair forces in society. And they've found a way to do it.”
The way they've done it is the same way that Trump supporters organized their attack on the Capitol: by turning to social media.
Weeks before the mob descended on the Capitol, Trump supporters refusing to accept the November election results took to social media sites like Parler and other internet forums and circulated plans for a mass protest in Washington that would coincide with the counting of electoral votes in Congress.
In the same vein, small- pocketed investors used the social media platform Reddit to launch their assault on Wall Street and drive GameStop's stock price higher. Reddit users on a forum called "WallStreetBets" took matters into their own hands after hedge funds began unloading the struggling retailer's stock through a process known as “short selling.”
In short selling, investors borrow a share and sell it in hopes of buying it back later at a lower price – and then pocketing the difference.
Furious Reddit users decided to strike back against the big hedge funds by launching a buying spree of GameStop stock, which caused the price to soar.
Suddenly, a movement was born.
“I do think this is a seminal moment,” Reddit co- founder Alexis Ohanian told CNBC on Thursday. “I don't think we go back to a world before this because these communities, they're a byproduct of the connected internet. Whether it's one platform or another, this is the new normal.
“We've watched the internet now, over the last 10, 15 years thanks to the rise of social media and all this infrastructure, bring a bottom- up revolution to so many industries,” he said. “We've seen this across media. We've seen this across so many sectors. And now it's happening to finance.”
Message boards have been rife with retail investors trading unsubstantiated rumors, rash speculation and trash talk since the internet's early days. But social media has given organized actions by retail investors and day traders some real muscle.
They band together on Facebook, Instagram and WhatsApp, messaging services such as Signal and Telegram and collaboration services including Slack to trade tips. But a major propeller of viral effort is Reddit.
Reddit forums, called subreddits, are cloaked in anonymity and animated by populist fervor.
Attitudes at the company are changing with the times. Reddit has been cracking down on objectionable content like hate speech. And, last month, when the major social media platforms banned Trump, Reddit shut down a subreddit where tens of thousands of Trump supporters congregated.
But the activity in finance subreddits hadn't gotten much attention until now. Wall Street Bets is a popular forum focused on options trading where online day traders band together to increase their buying power.
“Just looking at the comments around the internet. It's something that's very personal for a lot of people and a chance for Joe and Jane America, the sort of retail buyers of stock, to flex back and push back on these hedge funds,” said Ohanian, who resigned from Reddit's board in June.
“I really do think this is really the start of a new era for how we're going to perceive the public markets and then the interaction of the consumers with it.”
Not everyone is thrilled with the rebellion.
“If you want to call what happened at the Capitol a mob, you can also call what's happening at GameStop a mob, too,” said Ken Kamen, president of Mercadien Asset Management in Princeton, N. J.
People involved in a large movement, whether it's buying stock or instigating an insurrection, tend to get caught up in the moment and do things they otherwise wouldn't do, said Robert Cialdini, an expert on the science of persuasion and influence.
Just like the rioters who stormed the Capitol, many small investors are buying GameStop stock without stopping to consider the consequences, Kamen said.