Reddit vs Wall Street: A glorious game of 'stonks'

Reddit vs Wall Street: A glorious game of 'stonks'

Credit: Reuters file photo.

Stonks: Slang - a tongue-in-cheek use of the word "Stocks", usually used in the form of a meme.

Everybody loves money, that's a well-known fact. This is especially true for the ultra-rich, who have long accumulated wealth in the stock markets by trading on a broad range of stocks around the world. They are, for all intents and purposes, the Goliaths of the industry.

But this amalgamated Goliath is facing a relentless challenge from an unlikely adversary: Reddit. Or rather, a single community on Reddit. Fuelled by years of rage at market manipulation, Redditors have finally come together to upend  the entire game on itself, all over a single game store whose stock has seen wild surges over the last few days.

But what is it all about? Here's what you need to know.

GameStop, the centre of the drama:

Based out of Texas, United States, GameStop is a brick-and-mortar game store chain founded over 37 years ago. The company works in the areas of selling games and games consoles, and buying used games and games consoles to refurbish and resell them in the market.

As digital game marketplaces took precedent for publishers, GameStop, like many others, faced the brunt of falling sales of new and used games, and many of its stores were liquidated over the years.

This became more apparent when the Covid-19 pandemic hit, effectively locking most people into their homes, even though GameStop made a short-lived, controversial decision to classify itself as an essential service in order to remain open.

So what is going on with GameStop's stock?

It’s called a 'short squeeze', and it involves investors betting on which way a stock will go — up or down. These bets are placed by buying the shares themselves, or stock options, which we’ll grossly oversimplify here.

Investors who bet against a stock are called “shorts. In GameStop’s case, the shorts include at least two big hedge funds.

Read: From broker notes to memes: How the stock market went viral

Shorting a stock essentially means borrowing shares from a broker and selling them with the agreement that the shares would be returned later. When the price falls, you buy back the shares and pocket the difference. But shorting a stock is risky — if the price rises, you can lose big.

Sometimes you just make a bad bet. But you can also lose if someone tries to push up the price by buying lots of shares, even though the company isn’t doing anything different.

This is the squeeze.

Shorts have to close their position — that is, buy up the shares they owe their brokers and return them. This demand kicks the stock higher, and a short who acts too late could be ruined.

Usually, these kinds of standoffs involve sophisticated Wall Street investors, for example when Bill Ackman squared off against two other billionaires — Daniel Loeb and Carl Icahn — over the dietary supplement maker Herbalife.

Who started the GameStop frenzy?

Keith Patrick Gill, who goes by the name "Roaring Kitty" is the person behind a series of YouTube streams which, along with a string of posts by Reddit user DFV, helped attract a flood of retail cash into GameStop, burning hedge funds who had bet against the company and roiling the broader market.

In his social media messages and videos, Gill repeatedly made the bull case for the beleaguered bricks-and-mortar retailer and shared images of his trading account profit on the stock, sparking a following of likeminded GameStop enthusiasts.

Read: How a Reddit user 'Roaring Kitty' and his friends roiled the markets

But all of this would not have been possible if not for r/wallstreetbets, an otherwise clandestine community of people who talk about betting on stocks, which has come into the limelight in recent days due to the GameStop drama. The community has been an online rallying spot for those urging people to buy and hold GameStop shares, punishing short sellers by sending prices soaring.

The subreddit was filled with memes as its memebers, and even those unrelated to the affair, shared phrases such as "stonks" or "Gamestonks". "To the moon" is a particular favourite of the community, with a number of highly rated posts using it as a rallying cry to express their belief that a stock will rise significantly. The phrase is often accompanied by a rocket emoji.

The company's dizzying rocket ride on Wall Street - the shares have gone from just $18.84 at the beginning of the year to as high as $492 - is a case of the masses rebelling against one-percenters hoarding the world's wealth.

And their next target? Theatre chain AMC, former phone maker BlackBerry, and Dogecoin, a meme cryptocurrency, but that's a story for another day.

What's the backlash all about?

When Redditors detected that hedge funds were shorting GameStop stock and raking in the money, they decided to strike it with a counter-campaign, buying up stock by the thousands - causing the share prices to skyrocket and causing significant losses to the hedge funds to hemmorage money.

The rampant rate at which money changed hands triggered brokers like Robinhood, who promptly halted all trading on the GME quote, resulting in an explosive rebound, which ultimately amounted to a class-action lawsuit against the broker, accusing it of doing the bidding of Wall Street and rigging the market against its own customers, while the brokerage's CEO said it limited trade to protect firm and customers. It eventually restored trading on the stock.

The backlash has even found its way into the US political sphere, with some representatives calling for a probe into the brokerage's alleged market manipulation.

The GameStop saga is a generational clash and a referendum on who controls the markets, pitting an army of retail investors — many of them young digital natives — against hedge fund short-sellers, who had bet that GameStop stock would fall.

With agency inputs