The GameStop battle followed the usual playbook: a fight between “the market can stay irrational longer than you can stay solvent” versus “the big guys can stay solvent longer than you can hold your nerve, and we can change the rules”.
Wall Street right now
28 January 2021 (Chania, Crete) – Wow. The break-out star of 2021 so far: the unruly mob.
Yes, it started with that terrifying and deadly insurrection at the Capitol. And now the mob has appeared on a thuggish Reddit forum called WallStreetBets, where users’ growing interest in the stock of video game retailer GameStop sent the stock soaring from around $17 at the start of the year to $347 yesterday. A similar group took an interest in the struggling movie theater chain AMC on Wednesday, and its stock went up 200 percent.
Today its meteoric rise fizzled out after small investors were barred from trading in groups that had soared in value. More here. And, oh, the irony. Robinhood blocked retail investors from purchasing stock – while hedge funds are freely able to trade the stock as they see fit. Just waiting for a Congressional hearing to pop up. But more important is the branding. This is going to hurt them long term, though I doubt it’ll kill them. But their entire messaging strategy is in the toilet now – how can you say you fight for the user when you do something like this? Who’s going to believe you?
In each case, platforms and web services provided important tools to help the mob organize. But this isn’t a story about algorithms sowing chaos. It’s about something bigger — something cultural, even societal. And if January is any guide, it may prove to be one of the defining stories of the year, as Casey Newton pointed out on his blog:
We’ve seen internet mobs for years now, of course. There were the Reddit vigilantes who trawled through digital photos and videos in an effort to identify the Boston marathon bombers in 2013. A year later, Gamergate set the template for culture wars fought online. By 2016, when a British government agency asked the internet what to name its new $287 million polar research vessel, it seemed inevitable that a mob would rise up to give it a ridiculous name. Indeed it did, and Boaty McBoatface was born.
Mobs have increasingly turned their attention to politics, too. Last year, a group of TikTok users and K-pop fans registered by the hundreds of thousands to attend a rally for President Trump, and then no-showed to embarrass him. Trump’s resulting outrage is said to have informed his unsuccessful effort to ban TikTok in the United States.
And now, GameStop. Yes, we all agree that the storming of the Capitol was outrageous. But what about, as one Twitter wag called it, the storming of the capital? Many people are having great fun reading about the unwashed masses on WallStreetBets using a financial technique known as a “short squeeze” to wreak havoc on hedge funds and private equity firms. The irrational exuberance managed to take down many brokerages and trading apps yesterday.
I’ll start with what the mob did and how they did it, and conclude with some thoughts on platforms and web services and how they have provided important tools to help “the mob” organize.
AND NOTE: it is not all “the mob at play”. There was a lot of professional money rolling around in this, too. I will explain that below.
In retrospect, stock memes were inevitable. Unfortunately, it looks like a lot of brokerages weren’t ready. Let’s start with a few points about the GameStop trading fury.
If you haven’t been paying attention, GameStop’s stock has been soaring in a remarkably volatile fashion; on January 22nd, GameStop zoomed upward 69 percent (nice) before it triggered a circuit breaker halt. The following Monday, January 25th, GameStop trading was halted nine times. It started around $17 at the start of the year to $347 yesterday. Run all the numbers and GameStop stock rose an astounding 1,600 percent in January alone. And then … collapse (see the Guardian link above).
What happened is a little complex, but basically boils down to traders gathering on Reddit, Discord, and elsewhere to encourage others to buy call options on the stock. The internet’s exuberance over GameStop also affected AMC, Bed Bath and Beyond, BlackBerry, Tootsie Roll, and other companies. The trading action further enriched some of the world’s richest people – and wiped out many more, as I will explain below.
MY BACKGROUND: After university, I spent 3+ years as a currency trader, then as a general options trader, and then as a M&A analyst, all at Solomon Brothers, before I went to law school. At university I earned a major degree in Economics and a minor degree (which required slightly fewer diploma credits than the major) in Physics (a lifetime interest). I was hired because of my minor degree, not major degree, because the laws of physics are very important for traders to understand in various respects, especially technical analysis. It’s a long story. It needs another post.
At present I do not own any stocks but I still dabble, from time to time, in the options markets. It’s a nice way to cover my wine tab. But you need to set “stop orders” or stay glued to the screen while your trade is “live”.
I have spoken to current full-time traders and they tell me GameStop is only the most visible example of today’s options-fuelled stock market mania. While the increasing use of derivatives has been a hallmark of previous retail trading frenzies – such as the late 1990s dotcom boom – the current popularity is alarming even seasoned observers.
And there are three things to remember as you watch the chaos unfolding with GameStop’s stock price:
1. First, Wall Street is just what happens when you mix money with feelings
2. Second, the internet is real life
3. Third, the Street always wins, especially if you’re trading with Robinhood
On the surface, this doesn’t make sense. GameStop, a video game, consumer electronics, and gaming merchandise retailer founded a year before Blockbuster, is part of a dwindling cohort of IRL businesses that are being starved by online marketplaces. These days, you can just buy video games over the internet instead of going to a soul-killing strip mall in Iowa City to buy a physical copy of the game. GameStop’s business has been suffering as a result.
But currently, many people are at home and bored, and consequently, interest in day trading has shot through the roof. As I wrote in a post last year, this explains the incredible spike in trading volumes throughout 2020.
So, if you think GameStop will fail and the stock will go down, or even that the company will go bankrupt, there’s a way to make money on that. Typically, this is done by short selling – a practice where you borrow shares for a fee and sell them for (ideally) a high price, then buy them back at (ideally) a lower price to return them. This can make you a lot of money, especially if the company goes bankrupt and you don’t have to return the stock.
But it can also go the other way … up. The thing about short selling is that you lose money if the stock goes up, and your losses are potentially infinite if the stock keeps going up. There are several other bad things that can also happen, such as an increase in fees or the original investor wanting their stock back. This means some shorts will be forced to “cover,” or buy the stock back at a high price, which sends the price even higher.
And that is what the Reddit forum, called r/WallStreetBets which describes itself as being “like 4chan found a Bloomberg Terminal”, did – get hundreds of like-minded traders to bid the price up. A year ago, a user called delaneydi argued that GameStop was underpriced by the market. For a while, the idea that r/WallStreetBets would take over GameStop was a joke – but then it turned serious. The idea was to punish short-sellers, and for the little guys to pummel Wall Street.
This short video, though dated, provides a good overview of the issues involved:
For retail investors, this process has gotten easier and cheaper because of free apps such as Robinhood. In addition to letting you buy and sell stock, you can easily buy an option for stock, instead of the stock itself. If you are feeling confident in a stock, you can buy a call option – which lets you buy a stock at a specific price on a specific date.
Let’s say my fake investing firm wants to buy a call option on Company X. Currently, shares of Company X are trading at $10. I feel confident in Company X, so I buy options that let me buy 100 shares of Company X stock for $25 a share on March 1st. This contract is usually cheaper than the share price.
So let’s say Company X goes on an epic run in February, and by February 15th, it’s up to $50 a share. I can sell my options for more than I paid for them, if I want. Or I can continue to hold onto them until March 1st, when I take delivery of the 100 shares, which are now trading at $55 a share, and immediately sell them. As a result, I make a profit of $30 per share, minus whatever fees I paid for the options.
Options were once a fairly sophisticated thing to trade – something ordinary people didn’t really do. But Robinhood makes the option trades easy and free. Plus, there’s a social aspect to the trades – which is where r/WallStreetBets come in. Stocks are memes now, and you trade them to show off to your friends. Reddit and other social media sites are littered with screen shots of peoples’ GameStop portfolio value. Everybody is posting gain porn.
Day traders, such as the ones on r/WallStreetBets, are typically held in contempt by professional traders, and they are acutely aware of this. The professional short-sellers who created the possibility of a short squeeze underestimated the day traders’ sophistication, and r/WallStreetBets pounced. It was time “to troll Wall Street out of a f*ckload of money!”
So some fine people of r/WallStreetBets decided GameStop was undervalued, and the stock would go up, so they put up a bunch of posts about how they were buying GameStop options. This drove up the stock price for GameStop, as their counterparties had to load up on stock to balance, and then more stock as more people bought options and so on. The soaring stock meant some shorts had to cover, sending the stock up further. As of January 26th, short-sellers were showing combined losses of about $5 billion in 2021, just from their GameStop positions alone.
What does Robinhood have to do with this? Well, it makes options trading much more accessible to retail investors – but there’s something else. Trades on Robinhood are free. But Robinhood isn’t offering free trades to be nice; the company gets paid by some big-time investors such as Citadel Securities to see what retail investors are doing. This phenomenon, which other brokerages are engaged in as well, is called payment for order flow. Citadel Securities makes its money on these orders by automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread.
The argument in favor of this practice is, essentially, retail investors get better prices than they would on the open market. The practice is controversial, though, because some critics say it harms investors. It’s theoretically possible to “front run” orders by, for example, jumping ahead of a customer’s stock purchase to buy it themselves, making a small gain if the share price increases. So far, there is no suggestion that Citadel Securities engages in such activity, which is prohibited by SEC.
Which means that Wall Street can also get in on screwing Wall Street. And it’s not just Citadel Securities. I’d be very surprised if high-frequency trading algorithms weren’t also getting in on the fun. Plus, Chamath Palihapitiya, the Silicon Valley SPAC icon, has decided to yolo along with the Redditors. (“Yolo” as a verb appears to be part of the r/WallStreetBets peculiar parlance.) Elon Musk, a man who notoriously hates short-sellers, is also observing the chaos.
As noted at the start, this is complex stuff. And it is a situation where a company’s stock price has been completely untethered to reality, in what Matt Levine has called a kind of “nihilistic gambling.” I have known Matt for years and have subscribed to his newsletter/blog as my one-source for what is happening in the securities business. His GameStop essay should be your only-read-you-need-on-GameStop for a point-by-point analysis of how these GameStop trades work. You can read it by clicking here.
As I noted in a post last year, cheap capital has completely distorted financial markets at all levels. I even noted Robinhood. People sitting at home, bored, spending more time on social media. Just another new level to distort markets. Combined with social platform dynamics. Or has Ranjan Roy has said:
Cheap capital via zero interest rates has combined with social platform dynamics and created a completely distorted market economy that rewards grifting above all else.
Everybody has been sucked into stuff like this paragraph from the New York Times (there are scores of other examples):
While the hedge funds and other professional money managers had been shorting GameStop’s shares, betting that its stock was doomed to further decline, the retail investors — online traders, mom-and-pop investors, small brokers and others — have been pushing the other way, buying shares and stock options. That caused GameStop’s market value to increase to over $24 billion from $2 billion in a matter of days. Its shares have risen over 1,700 percent since December. Between Tuesday and Wednesday, the market value rose over $10 billion.
But that is not true, as many have pointed out. Professional money is popping up on both sides of the trade. There are very openly “hedge funds and professional money managers” on both sides of all these trades, not just on the short side. They’re openly talking about it. And the volume clearly indicates there’s bigger money at work. Matt Levine (the chap I referenced above) pointed out:
Surely a lot of professional investors are white-knuckling this thing, buying it as a trade and hoping they can get out before the redditors do. “Lol GME to 1000 [rocket emoji] [rocket emoji] [rocket emoji]” is a perfectly good hedge fund thesis right now. WallStreetBets started this but anyone can jump in now.
Judging by volumes, everyone has. Yesterday Bloomberg’s Eric Balchunas pointed out that GameStop was “the most traded equity on the planet,” with $20 billion of volume. Tesla was No. 2. GameStop closed yesterday at $147.98, for a market capitalization of about $10 billion, up 93% from the day before, up 641% from two weeks ago.
“Retail”? Well, I can tell you I have a boatload of pretty well-heeled friends in on these trades – not the media obsessed “laid-off college-aged kids” and “mom-and -pop” investors.
As I noted above, Citadel Securities pays Robinhood a lot of money for their order flow, so the theory is that they could be front-running these orders, riding and amplifying the moves. The conspiracy is that if they see a large number of buy orders coming in, they could buy a ton more, and really move the market.
Many pooh-pooh the theory saying “all the trades are out in the open”. But Ranjan Roy notes:
I’d still contend, as someone who was a tick-by-tick trader, catching the second-by-second wave in a scenario like this is far more valuable than the simple knowledge that r/WSB is going to buy $GME. The timing is everything. It’s one thing to know $GME will be bought. It’s another thing to know the exact morning people are really buying. He, of institutional money power, can ride the wave and become the difference between an effective short squeeze or the longs being dead in the water.
And Matt Stoller (I have mentioned him numerous times in previous posts) in a Tweet yesterday:
Apparently at 1:32pm, a 587k shares of GameStop traded at $327 a share, which is $187 million. That’s not coming from Robinhood. Wall Street is on both sides of this battle. Somebody is playing Big Time.
Or as Bloomberg noted this morning, Blackrock is making money on this, and vulture-like private equity funds like Sycamore, along with a couple of Chinese billionaires.
When the tourists leave, Gamestop’s stock will come crashing down. And it did today. That’s how this stuff works out. For Reddit and Elon Musk and all the others this is an absurd gambling token, a toy adrift on market sentiment. But when that stock starts absolutely tanking – what happens? Well, Robinhood’s founders are going to be liquid billionaires pretty soon no matter what happens, while the retail investors are left holding the bag.
Yes, those retail traders everyone is cheering on. Those folks posting their gain porn. Not all will win. Remember the day trader who killed nine people at his office? Or the story about Robinhood adding bulletproof glass after similar traders kept showing up at its office? Or the 20-year olds who killed themselves after misunderstanding their options exposure?
Things will move just as fast on the way down.
Back in 2003/2004 when my digital media work took me into the inner workings of social media – the tubes and the pipes of social media technology – I jumped into the website 4chan with its variety of image boards with subjects ranging from “pornography” to “alternative sports”.
But the key was /b/. This was the “random” board, where users were permitted to post anything as long as it wasn’t illegal, and every post was anonymous. Whenever a trend emerged its origin was, by design, impossible to locate. Every idea, every joke format, every new target, seemed collectively agreed upon, with no single leader or accountable party. As Dan Dixon the social media writer and academic called it “ants swarming a carcass”.
So /b/ – the “random” board – was the vehicle to fuel the GameStop assault.
Yes, in the beginning, when I “read” 4chan or Reddit I did not always “get it”. Hence the need for grandchildren to “splain it to me”. The references, deciphering the slang, etc. But what came through was it fueled everybody’s worst traits. This is why 4chan was a blueprint for white supremacist groups, for school shooting manifestos, and fuelled the rise of Donald Trump’s online fandom.
Now … the securities markets are in crisis because the subreddit r/wallstreetbets decided to invest in GameStop with such relentless enthusiasm that the stock became wildly overvalued. I have explained, above, the economic mechanics of the GameStop fiasco. The chaotic logic? That will need a longer telling. The fun part was seeing how underequipped traditional media is to describe such incidents. Neil Irwin, a senior economics correspondent for the New York Times, tweeted:
“Trying to make sense of the Gamestop thing as a 42-year-old who has covered econ and markets for years, I feel like Don Draper sitting back and trying to listen to the Beatles, then giving up after a short while, confused and discomfited.”
The redditors’ motivations were perhaps most accurately described by Matt Levine of Bloomberg (noted above) who did not attempt to pin them down: “This is fun, a nice social outing in an age of social distancing, a risky but potentially lucrative collective entertainment.”
The mainstream media struggles to explain events like this because the events are arranged to be indescribable, irreducible, by those external to it. Identifying this slipperiness is particularly important given that the juvenile disposition upon which it is premised is ascendant. Journalists covering the story have tended to gesture towards “possible impetuses”, and there are undoubtedly many underlying factors that led to r/wallstreetbets’ choosing GameStop as a “meme stock”, which have surely evolved with the saga (screwing Wall Street; making money; a genuine belief in the fundamentals of GameStop’s business model). However, if we were to reduce this to a single motivation, it is a logic best described with a phrase long ago popular on 4chan, as being “for the lulz”. As I noted in my piece on the assault on the Capitol:
Reality TV has won America. Everything had been Kardashianized. Power now comes from holding attention. Whether you’re creating a billion-dollar cosmetics line, starting a coding school, or becoming President, as long as the dominant distribution forms of information are driven by ad-based algorithms, the loudest, craziest, weirdest voices will win. Outlandish performance is central to any outcome. The performative element is now part of the strategy.
Yeah, yeah. I’ve read the “analysis. This is all directed towards good (destroying hedge funds) or evil (propagating a shockingly successful conspiracy theory that threatens the democratic stability of the nation with the world’s largest military, eventually leading to the storming of the American Capitol) and its charm can be attributed to all kinds of psychologies (loneliness, economic inequality, toxic masculinity).
But the problem is it cannot be read aloud by a “serious newsreader” with the obligation to “explain” the motivation as a political or social movement. It is intentionally senseless, taking the form of a joke rather than a philosophy. And nobody wants a joke explained.
Looking back, Elias Canetti was right. There was an awful inevitability to the rise of 4chan-think. In his book Crowds and Power, he wrote “Only the growth of the crowd prevents those who belong to it creeping back under their private burdens.” To survive it had to spread. It is where our social technology has taken us. Adolescent occupation re-emerges as a prominent cultural force. Wow.
Like my muses Ben Thompson and Casey Newton, I sometimes blog about the difference between internet problems and platform problems. Using Casey’s definition:
Internet problems arise from a global network that allows groups of every kind to find each other easily online, communicate, organize, create and publish media, and meet up in the real world. Platform problems are narrower: they come from decisions about which accounts, posts, and groups to promote to others; the incentives their products create; and the ways they choose to moderate and govern user behavior.
So it’s easy to look at the unruly mobs of 2021 and see a platform problem, and indeed many have written about it this way. Capitol insurrectionists used platforms including Facebook and Parler to organize and communicate; the stock market mania of the past week originated on Reddit.
But I agree with Casey: none of this is about platform dynamics. A platform seems necessary to start a big online mob, but not sufficient. The larger force is the internet introducing new people to each other at a huge scale, and at high speed, unleashing highly unpredictable and sometimes dangerous forces on the world around them. That force can be accelerated by a post with thousands of upvotes, or a prominent recommendation to join a group. But it’s not the platform itself that is creating the movement.
We all look to the brilliant end-of-the-year post last month from Vitalik Buterin who reflected on how cultural forces and basic concepts in 20th century economics – supply and demand, scarcity, economies of scale – fail to help us understand the world the internet has created. The default mode of communication has gone from one-to-one to one-to-many; those communications spread around the world instantly; those communications unite people into new tribes across diverse geographies; and the new tribes are transforming society. Buterin concludes his post as follows:
So we have a world where:
*One-to-one interactions are less important, one-to-many and many-to-many interactions are more important.
*The environment is much more chaotic, and difficult to model with clean and simple equations. Many-to-many interactions particularly follow strange rules that we still do not understand well.
*The environment is dense, and different categories of powerful actors are forced to live quite closely side by side with each other.
It is a theme I will return to in my work-in-progress essay “American democracy at dusk, that these increasingly wild and unpredictable and many-to-many interactions, where powerful new tribes emerge rapidly and begin exerting powerful forces on the world, have led to nihilism reigning supreme. Because the default condition of humankind is not to thrive in broadly egalitarian and stable democratic arrangements that get unsettled only when something happens to unsettle them.
It was the Trump era’s brilliance to zero in on platform problems, to goad big technology companies to belatedly address the ills that come with the unmonitored algorithmic amplification of speech. But the internet is bigger than social networks. It misses the entire origin and behavior of these new online mobs.
Much more to write but I must return to my SolarWinds project. I leave you with the Fox News expert who said last night “we must ban social media from talking about short stocks”.
Cow Jones