Last week shares of video game store GameStop were trading at about $40 a share. Then, a group of Reddit users invested. The move sent stocks soaring and raised several questions.
RACHEL MARTIN, HOST:
The hottest stock on Wall Street is a struggling video game store you walk past in shopping malls. GameStop – its share price has spiked over 1,000% in recent days, all because of amateur day traders who gather in a Reddit forum. Mary Childs is the co-host of NPR’s Planet Money podcast, and Noel talked with her.
NOEL KING, HOST:
MARY CHILDS, BYLINE: Hi.
KING: So I found myself up at 10 o’clock at night texting with my kid brother about GameStop stock, and I realized I really need to know what is going on here. What’s going on here?
CHILDS: So it starts in a place on the Internet known as wallstreetbets. It’s this forum on Reddit where all these day trader types, these nonprofessionals, get together and trade stock tips, as well as memes and screen grabs of their trades and a ton of rocketship emojis. This place has become really active since the start of the pandemic, with people kind of trapped at home looking for something to do. And a while back, one of these Reddit traders started arguing for why everyone should buy GameStop. This was a weird argument. You know, this is an old mall brand with exposure to commercial real estate. It’s not exactly a natural buy right now.
CHILDS: But that actually became part of the argument for why you should buy it because the argument against GameStop made it a good stock to bet on because there was so much interest in betting against it. All these big established hedge funds were betting against it. So that turned into this rallying cry that, you know, we should take on big Wall Street. And from there, it took off.
KING: So the hedge funds are short selling it, which is something that hedge funds do. And then it takes a twist, right?
CHILDS: Yes. Basically, these big hedge funds were betting that the shares would go down, right? They were shorting it. So to do that, they have to borrow the shares of the stock and sell it. And if the price goes down, then they can buy it back at that lower price, return the borrowed stock and pocket that price difference. But if the price goes up, if they’re wrong, they have to go buy back that stock at the new higher price. And that leaves them vulnerable to, you know, if the price shoots up really fast, then all of a sudden that’s called a short squeeze. And that’s exactly what happened here. It kind of amplifies the effect even more.
KING: So it makes sense inherently that big hedge funds might be able to move markets, right? They have, like, billions of dollars. But this is a case where small investors moved the market. How do they manage to do that?
CHILDS: Basically, wallstreetbets has learned how to weaponize the tools that they’re using. So they’re using options. And functionally, you can buy options for way less money than you need to buy the actual stock. So that means that you can take your pennies on the dollar and go play in the market. And the way that they’re playing, they found ways to lean on the banks that sell them the stocks, to lean on these hedge funds in such a way that exploit the mechanics of the options and that it can amplify everything that they’re doing and get the most bang for their buck.
KING: Mary, what does this tell us about how Wall Street works and who actually has power versus who maybe we assumed has power?
CHILDS: Absolutely. This has all these kind of same strains as Occupy Wall Street where people are saying, you know, these big hedge funds, why should they get to control the stock market? The system’s rigged. And this has been a weird way for people to forcibly take that back, to upend those structures and upend that power dynamic. So it’s not clear to me where this ends up. And certainly there are going to be people that lose a lot more money than they necessarily have. But at this moment, it feels like popular opinion is a little bit more with wallstreetbets.
KING: Mary Childs is a co-host of NPR’s Planet Money podcast. Mary, thanks so much.
CHILDS: Thank you.
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