Internet-based "pump-and-dump" stock schemes are nothing new. A big investor buys huge amounts of a penny stock and cashes out with a volume big enough to crash the stock price again, leaving all the other investors who bought the stock expecting it to go up with huge margin calls instead. This time though it's the small day-traders who are doing it, and their victims are massive hedge funds expecting continued economic catastrophe as COVID-19 rages on through our Trump-shattered economy.
GameStop is a struggling, kind of boring, mid-size retailer stuck in a legacy business — selling physical video games. But it’s also pretty much the only company anyone on Wall Street is talking about right now after its stock rose 160% in a matter of hours on Monday morning to an all-time high of $159. (By day’s end, GameStop’s price had been cut by more than half, but that still left it up more than 300% this year and almost 3,000% from its 52-week low. And it was up another 15% at Tuesday’s open.)
It isn’t GameStop’s precipitous rise, impressive as that’s been, that has everyone fascinated. Instead, it’s what is fueling that rise: concentrated buying by thousands upon thousands of small individual investors who are using sites like Reddit and Robinhood to drive up what are now being called “meme stocks.” GameStop is the best-known of these meme stocks, simply because its gains have become so outrageous. But it was preceded last year by Hertz and Kodak, which, despite having struggling businesses, saw their stock prices soar when they became Reddit darlings. And now stocks like AMC, Nokia, and Blackberry (which is, yes, still in business) have also caught Redditors’ fancy.
It’s easy to see the meme-stock boom as just a speculative bubble, and evidence of how the current stock market has lost touch with reality. Speculative bubbles in so-called “story stocks” are, after all, familiar things on Wall Street. In the late 1950s, uranium stocks soared, followed a few years later by bowling stocks, and then RV stocks. (In 1969, a company called Skyline Homes saw its shares rise twentyfold.) And we all know what happened to internet stocks in the late ’90s. But in fact, what’s happening with meme stocks is very different from those previous crazes.
In a classic speculative craze, investors may take cues from each other — the fact that everyone is buying internet stocks makes you think it’s smart to buy internet stocks — but they’re not working together to make stock prices rise.
With meme stocks, on the other hand, that’s exactly what’s happening: The small investors on the r/Wallstreetbets subreddit (which has 2 million subscribers) and other sites are taking part in a conscious collective effort to drive the prices of these stocks up. No one is in charge of this effort, though, of course, some voices are louder than others. But it is a self-organized campaign with people using the message boards to communicate with each other, encourage each other, and reassure each other (thus the many posts on r/Wallstreetbets admonishing fellow “autists” — their self-mocking term for each other — to not lose their nerve and to keep holding GameStop’s stock). Thus threads with titles “We are the captains now,” “Have no fear, GME gang. We are consolidating in preparation for tomorrow’s moon landing,” and “GME — it never has to end.”
In other words, what’s happening with GameStop looks less like a speculative bubble and more like a contemporary, internet-mediated version of the “bull raids” that were characteristic of the stock market in the early 20th century, when organized pools of investors would combine to drive stock prices up.
Perhaps more interestingly, it also looks a lot like what happened during the 2016 presidential election. Over the course of that campaign, a loosely organized community of alt-right meme lords and their followers, centered on sites like 4chan and Reddit, adeptly used social media to elevate Donald Trump’s candidacy while barraging Hillary Clinton with an endless flow of memes targeting her supposed inauthenticity and corruption. What they did, in effect, was exploit the opportunities created by social media to disrupt the normal workings of the political system, at least in part for the lolz. The traders on r/Wallstreetbets — which describes itself, tellingly, as “Like 4chan found a Bloomberg Terminal” — are trying to do the same thing to Wall Street.
Yep, that's right. The memelords of the day-trading set have declared war on Wall Street, and there's enough capital, expertise, and timing experience when combined to cause some major hedge fund managers some real nightmares, simply by having enough leverage when banded together to flip the script on shorted stocks.
It's probably not going to end well, but maybe this will finally bring about some badly needed Wall Street reform, not that the Biden administration doesn't already have a crapton to do.