SHORTING STOCK - A BRIEF EXPLAINER
First up, a short explainer on shorting stock (shares in a corporation). Shorting stock or short selling stock essentially is borrowing stock (that you think is going to fall in value) from a broker and selling it at its current price, then buying it back (at the lower price) and returning the shares, but keeping the difference as profit. It’s a strategy used by high-risk investment funds (hedge funds) to try to maximise profits.
For example (in a successful short selling scenario) investors borrow stock valued at $10 from someone, sell it on for that price, and return the stock to them after buying it back for $7, after the stock price falls, making a $3 profit themselves.
The risk is that they are counting on being able to replace what they borrowed with something cheaper. A ‘short squeeze’ happens when traders, who bet the price of an asset will fall, scramble after the stock jumps sharply higher, unexpectedly.
REDDIT VS WALL STREET: THE GAMESTOP EFFECT
So what happened with GameStop? Essentially, a hive mind of average people on Reddit took on ‘Wall Street’ by coming together to put a ‘short squeeze’ on GamesStop stock, after some big hedge fund players bet against the video game company to fail.
A Reddit forum called Wall Street Bets exists of a group of ordinary folk who enjoy betting their own money on high-risk high-reward options on the stock market: “It is full of day traders without a ton of money who YOLO their money into a single stock...to hopefully realize a giant profit in a short period of time by taking advantage of temporary price movements. Historically, the top posts in this subreddit are “loss porn” and “gain porn,”...screenshots of people’s investment portfolios showing how they turned a small amount of money into a huge amount of money in a short period of time, or turned a huge amount of money into a tiny amount of money in a short period of time... The broader financial investment world thinks these people are morons and degenerates” Vice
Some weeks ago a user noticed that a big hedge fund had taken out shorts against GameStop (a video gaming company some users would be nostalgic for)... So, they all decided to place trades they knew would send the price higher. The ‘chaotic’ action was also ignited via a Wall Street Bets’ Discord group - another instant messaging platform. Michael, a 26 year old member of the subreddit group (which has over 4.5 million members), got in on the action earlier this week:
“I have known about this forum for about a year or two, they came to prominence in my mind originally when they all made a fortune on Tesla’s insane share price rally. They came back into my mind a few weeks ago when I was watching a YouTube video about the crazy swings people were having making big bets on highly risky options contracts (some of them turning $10k into $400k in the space of a week then proceeding to lose it all the next day in pursuit of joining the “two comma club” - millionaires). I had a look through the forum to see what they were up to and GameStop seemed to be all the rage. This seemed ridiculous to me as you would think this is like buying stock in Xtra-Vision in 2008, but anyway a lot of them were betting big money on very ‘out-of-the-money’ call options. Over the next few days I continued to track GameStop’s share price and cringed as it went from $10 to $20 to $30 to $40 to $70. This Monday when the share price was around $88 I finally decided I was sick of watching teenagers make millions and decided to buy in myself.” Michael, 26, Ireland
In short...“A Hedge Fund bet GameStop would fail. A Reddit community rallied against them. The community bought shares. The price went up. And up. The Hedge Fund lost billions.” Do Lectures.
In fact, GameStop stock went up over 2,200%, earning its 3 largest shareholders over 2 billion.
Word spread quickly beyond the Reddit forum - “Gamestonk!!” tweeted Elon Musk on Jan 26th, with a link to the wallstreetbets subreddit - which meant that more got in on the action, and other companies started to benefit from the GameStop effect too… (Stonk is just a funny way to say stock).
The phenomenon is helping other companies stock to soar similarly, including AMC Entertainment, Nokia and Blackberry.
AN ECONOMIC TURNING POINT?
“We are witnessing the French Revolution of Finance.” Anthony Scaramucci
While many Wall Street Bets (WSB) Reddit users have made a lot of money on this, it’s clear that it’s not about the money - but about the message, Us vs Them.
“People are essentially buying stocks as a middle finger to Wall Street and that whole process.The people that Wall Street represent is such a small percentage of the population. It’s fun to revel in a strange story of ordinary people vs elites - the punchline being the multi billion dollar cost to Wall Street.” Macon, 29, Redditor
Some of the backlash against the hedge funders is about the principle of shorting - seen as a legitimate way of profiting from business downfall. Plus, sometimes people listen to these hedge fund bets so closely that businesses can’t help BUT fail when a hedge fund has declared it so. Equally, 84% of the stock market is held by the top 10%. So, in that context it's pretty compelling that an online community has managed to subvert Wall Street’s bet on shorting share prices through apps (eg. Robinhood) that allows ordinary people to involve themselves in a traditionally closed shop. In this context, the Redditors actions have been interpreted as the primary front in a ‘micro class war’.
“In practise this means we are seeing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent memory…” Vice
“The stock market has gone crazy for an ailing games retail company. Or rather it was always crazy, and GameStop has exposed it.” The Guardian
But of course, the story doesn’t end there.
WALL STREET FIGHTS BACK
“It’s so bizarre, funny and so scary. The memes are fire. It’s all inevitably going to crash hard... In the meantime people are going to punt around and make cash as this stuff goes wild.” - Female, 23, Finance worker, London
Cue outrage on Wall Street as hedge funders start fighting back against the ‘normal-ish’ folk making them lose money…
A lot of these trades by Redditors were taking place on apps called Robinhood or Interactive Brokers (low fee, low commission way to trade stock). Robinhood gets a lot of their revenue from a company called Citadel, which were allegedly part of the ‘short’ position. All these traders blocked trading in a lot of the stock involved in the Redditors activity - such as GameStop and Nokia - only allowing people to sell their stock (not buy). This fizzled the rise in stock prices in the last day or so.
“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino” Alexandria Ocasio-Cortez
There was talk of market manipulation and volatility, despite there being no clear violations of securities law, showing how impossible this stuff is to police. The saga now continues as Redditors plan to hit Robinhood with a class action lawsuit - arguing that they were manipulating the market for the benefit of financial institutions who were not Robinhood's customers. And in the meantime, of course, we have the internet jokes and the memes.
BRAND TAKEOUTS
With GameStop we’ve witnessed the power of Reddit and online communities as new age power players in the financial realm. While what played out over the course of this week is for some about money redistribution (and ‘sticking it’ to the rich), the distribution of power is just as much a central theme to this story as any. Online forums have democratized information, enabling people to assert agency in arenas that they previously may have been powerless in.
Just think - consider the power dynamics in your world - where do you as a brand player exert power over your consumers? Then think again. Think of a world where the power has shifted in favour of the consumer/ the end user/ the ‘little person’. Think, and then act. Act in a progressive way to encourage and facilitate a power balance. Do this and your future is likely to be more secure.
Re-focus your understanding of community online and the many emerging communities that are built on top of social tech platforms. Reddit, for instance, is essentially a community-driven bulletin board where users get to promote what they think is of value. Getting kudos in spaces like this is a lot more difficult than in pay-to-play arenas such as Facebook.
And when it comes to value, price points and financial exchange with your customer target pool, be prepared for a savvier shopper. Financial literacy and stock investment quite literally went mainstream overnight. And in a pandemic world where savings have gone through the roof for many, there is a greater consumer hunger to manage, invest and spend money smarter. While some brands (such as Brewdog) have been promoting benefits with equity-shares for a while, the playing field is open in terms of how brands and businesses continue to facilitate value exchanges with their consumers, fans, employees and wider stakeholder groups. Time to get your Game.On.