GameStop Stock Turmoil Echoes Financial Crises From the Past

5 mn read

Wall Street investors have bet for years against the struggling video game retailer GameStop(NYSE: GME) in hopes it would continue to decline. As a result, millions of members on Reddit took the stock market by storm as they pushed up GameStop’s value and caused massive losses for famous hedge funds.

Investing has become easier for a new generation of investors fueled by strong online communities entering the stock market. By providing easy access to trading apps that eliminate trading fees, like Robinhood and TD Ameritrade, young people in the United States can invest right from their smartphones. The rise of Reddit investors taking on Wall Street was caused by the Reddit forum WallStreetBets, a group of 9.1 million Gen Z and Millennial subscribers.

Some users connect the GameStop surge to the Financial Crisis in 2008 and the Occupy Wall Street movement in 2011. “I think it’s personal,” mentioned Kiran Boggs, a 17-year old who runs an Instagram page dedicated to posting investing knowledge, stock market memes, and finance tips. Boggs told Eat News, “For young people like me, we remember the shockwaves and effects of the recession caused by these huge Wall Street firms that, to this day, still haven’t been held accountable for their actions.” The high school senior posts for a Gen Z audience aiming to prevent a repeat of Wall Street’s history in the country.

Photo: Robinhood

He continued, “Some may even remember the Occupy Wallstreet protests and how Wall Street elites came out of their highrises and offices to take pictures and laugh.” At the time, hundreds of activists protested against financial inequality and corporate money in politics by marching through New York’s Financial District. Subreddits created their own movement in a similar way, calling attention to capitalism by using the influence of social media to bring virtual crowds together to buy certain stocks and turn viral.

One post by Reddit user ssauronn, blamed hedge funds involved, such as Melvin Capital, and recalled the difficult times he experienced during the recession, “I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me.” During the recession, millions of people lost their jobs after the bursting of the U.S. housing bubble, which banks risked by selling mortgage backed securities with extremely high profits. According to the Bureau of Labor Statistics, the unemployment rate hit 10% and millions of Americans lost their jobs.

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There are a number of reasons why Redditors chose to stand up against big hedge funds, which vary between people who miss shopping at GameStop as teenagers, to those who simply aim to make money, and to the ones who want to get revenge on Wall Street. Boggs also mentioned, “It’s because of this shared anger, which has been magnified thanks to COVID, that the concept of ‘screw the man’ really came to fruition.” He continued, “Which mobilized a lot of young people to take their finances into their own hands and even make risky speculative investments on the stock market.” Boggs believes that for change to happen, people should become financially literate in order to invest smartly and prevent themselves, or others, from being taken advantage of.

GameStop’s share price suddenly soared as high as $350 in January, after its stock was below $20. The millions of Reddit traders drove up the price by forcing short sellers to buy back GameStop stock at a higher price than what they originally sold it for. Mainly with “meme” stocks that have high volatility, which have become popular for young investors dominating the market. This process of short selling is when investors bet against a stock by borrowing it to then sell, hoping to buy it back at a lower price and keep the difference. In this case, the Reddit community made it difficult for investors who had shorted GameStop’s stock to get them back, causing them to lose about $5 billion.

GameStop was not the only stock that suddenly soared, other struggling businesses such as AMC Entertainment, BlackBerry, American Airlines, and Bed Bath & Beyond were also heavily traded during the same time. One of the largest online brokerages and free trading apps, Robinhood, came under fire on social media for restricting users from buying shares of GameStop, AMC, and a number of other stocks that surged. As a way to boycott the company’s actions, WallStreetBets members rushed to give low one-star reviews to drive the app’s rating down, while some investors sued Robinhood for the losses they sustained.

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Robinhood CEO Vlad Tenev believed the decision was in the best interest of the company and aimed to protect customers. Robinhood stated in a blog post, “As a brokerage firm we have a lot of financial requirements, including SEC net capital obligations and clearinghouse deposits.”

Robinhood was hit with a class-action lawsuit alleging they had “deprived their customers of the ability to use their service. The company explained that some of those requirements “fluctuate based on volatility in the markets and can be substantial in the current environment.” This sparked outrage for young traders and it caused concern by both political parties, which tend to always disagree on most topics.

Photo: Alexandria Ocasio-Cortez/Twitter

Democratic Representative Alexandria Ocasio-Cortez, said Robinhood’s move was “unacceptable.” She tweeted, “We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” She expressed “support of a hearing if necessary” and received a surprising response from Republican Senator Ted Cruz who agreed with her.

Democratic Senator Elizabeth Warren of Massachusetts also tweeted criticism to Wall Street establishment’s, saying that, “the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price.” According to the White House Press Secretary, The Biden administration’s economic team is “monitoring” the stock market activity. During the same week, Robinhood, along with other brokerages had to ease the restrictions on the stock after the backlash, bringing GameStop shares back up. However, it is unclear whether Reddit users will repeat or maintain the rise of GME.

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Chief executives of Reddit, Robinhood, Melvin Capital, and Citadel CEO’s are expected to testify at a Congressional hearing, as well as the Reddit trader Keith Gill, who ignited the momentum of GME stocks. The House Committee on Financial Services will be holding the virtual hearing on February 18 to examine the unexpected escalation and blockage of stocks.

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Victoria Gonzalez is a U.S. correspondent for Eat News who covers a variety of topics about the entertainment world and politics.

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Eat News is a Taiwanese digital media, analyzes current events and issues through column articles, videos, visual aid, and exclusive interviews.

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