For many traditional Wall Street traders, this last week may have felt like a fever dream. That’s because in the past couple of days GameStop, a struggling video-game retail store, has seen a surge in stock prices that has defied everything that we know about stock, and challenged the very institution of our free market.
The story of the GameStop saga begins, much like many other stories in this millennium, on the Internet. It is a story full of winners and losers—as well as heroes and villains. The story begins on a Reddit forum called r/wallstreetbets, where a rag-tag group of arm-chair investors decided to beat the big guys (AKA Wall Street) at their own game. Their plan: to execute a ‘short squeeze’ by buying GameStop stock. Their goal: to drive the GameStop price up, trapping the billionaire hedge funds that had bet against the company.
Their plan worked. And within just a few days GameStop became the most heavily traded stock in the world, according to the New York Times. Suddenly, a failing company which closed over 300 stores last year became worth billions of dollars— even though the actual valuation of the company had not changed. The arm-chair investors had bet big and won big. Meanwhile, the hedge funds that had shorted the stock were scrambling for cash. One hedge fund had to get a $2.75 billion dollar bailout to make up for the loss. Suddenly, the little guy had beat the big guy at his own game—and the big guy wasn’t too happy about being the loser.
However, the Reddit armchair investors soon learned that when you have billions of dollars, you don’t have to take a loss sitting down. And instead of allowing this populous group of investors move in for the kill, the hedge funds decided to try and fight back. By then, the GameStop momentum had spread to other, normally lackluster companies— reviving brands such as AMC and Nokia at least momentarily. In response, trading apps such as Robinhood attempted to restrict the buying of these stocks. In the case of Robinhood, the company’s CEO Vlad Tenev claimed that it was done to protect his investors. However, many believe that the company had other (ulterior) motives. The company later reversed it’s restriction, allowing for limited trading of the still volatile stock.
As of right now, the drama of this saga is continuing to unfold and it is unclear what the lasting effects of this will be. When the markets closed on Friday, GameStop stock had finished at a $325.00 valuation. To put that into perspective, that is almost $200.00 more than Apple stock finished with— meaning that this David and Goliath battle is far from over. And while this story’s ‘Goliath’ may have deep pockets, at least our ‘David’ has the support of Elon Musk.