GameStop, Wall Street, and the Quest for Economic Equality
David may have slain Goliath, but Goliath is getting back up again.
It is the allegory that has defined a series of events surrounding a brick-and-mortar video game retailer that may have started in January 2021 but dominated the news throughout February and March: GameStop. It was a constantly evolving tale, yet one thing remained clear: hedge funds made bets on the company going bankrupt, only for young traders on the social news website Reddit to catch on and make them lose billions. Initially framed as a successful tale of the everyman against the establishment, it eventually became clear that the hedge funds survived the drama. Nonetheless, the events have started a conversation among economists about addressing economic inequality in the U.S. Such a conversation should address the connection between the motives of the traders and true solutions to economic inequality, and how they can be achieved by the so-called everyman on a similar scale to the GameStop events. As GameStop finishes selling off their stock to pay off their debt, a new congressional hearing is held on the events, and a new rally behind the cryptocurrency Dogecoin begins, it only makes sense for the conversation to continue. Even those that know little about the events should get involved, which requires a detailed explanation of the events as they stand at this moment.
The Events, Explained
Multiple factors led to the events surrounding GameStop, but an important one was the years-long resentment against Wall Street by the general population. In a paper titled “Counter Hegemonic Finance: The Gamestop Short Squeeze”, Dr. Usman W. Chohan says how much of the federal stimulus provided to the American people during the 2007–2008 financial crisis went in the hands of the financial elite instead. This led to the children of suffering parents seeking vengeance against the elite by taking to Reddit over a decade later to take back money they believed was theirs. Reddit co-founder Alexis Ohanian also compared the events to Occupy Wall Street in 2011, which saw protesters occupy Wall Street to address wealth inequality, political corruption, and corporate influence of the government in the U.S.
Another factor that led to the events was the decline in GameStop as a business, itself precipitated by various factors. The company received criticism from customers for its poor trade and exchange value for games, as well as the acquisition of companies that expanded its inventory to include non-video game merchandise. Employees also criticized GameStop’s business practices, such as its “Circle of Life” program in February 2017, which forced employees to lie about having new games in stock to sell more used games or risk getting fired, and in November 2020, a TikTok contest in which the reward was more working hours. This only worsened other factors, including competition with online sales of video games, and brick-and-mortar retailers struggling from the recession caused by the coronavirus pandemic, which led to a record decline in the company’s stocks.
Finally, there was r/WallStreetBets, a Reddit forum consisting of a group of mostly millennial traders founded by Jaime Rogozinski in 2012. It was intended as a place for traders to make high-risk trades with disposable income to make short-term profits. Rogozinski was banned from the forum in April 2020 for violating Reddit’s rules of promoting his book, WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials. Nine months later, these Reddit traders discovered that the hedge funds were making money off the declining price of GameStop stock by selling it and buying it back at lower prices. In response, the Reddit traders bought GameStop stock in droves to raise its value, causing the hedge funds to lose money by forcing them to sell the stock much earlier than intended. Enter the initial stock surge on January 28, which made headlines and then history. The stock started to fall until rising back up again on February 24, then falling again and rising once more on March 25.
“I think that the interesting part of it was that they appeared to have figured out something going on with the market that a lot of people are not aware of, which is this short selling phenomenon,” said Ian Sherr, an executive editor at CNET News who has been covering GameStop since 2010. “It was very much a kind of contained event. They tried to repeat it with Nokia and AMC and a bunch of other stocks. And it didn’t really happen in the same way because GameStop was a really unique stock.” Sherr compared GameStop to Volkswagen, which briefly enjoyed a similar short squeeze in 2008.
In response to the stock surge, app-based brokerage service Robinhood halted the buying of GameStop stock, claiming that it was due to their inability to provide sufficient funds for traders. But the traders accused Robinhood of manipulating the markets to help the hedge funds recoup their losses, a sentiment shared by politicians and businesspeople across the political spectrum. This led to a congressional hearing addressing Robinhood’s actions on February 18, which addressed whether the brokerage encouraged the Reddit traders to provoke the stock surge and whether they were capable of handling the surge. A second hearing was held on March 17, which addressed the gamification of investing, while a third hearing, which is planned for Thursday, will address rules for such investing. Meanwhile, multiple entertainment companies greenlit several adaptations of the events. Rogozinski himself contributed by selling the rights to his life story to RatPac Entertainment. By April 5, GameStop revealed their plans to sell off their stock, which they completed on April 26. This generated $551 million for the company, which the company used to pay off their debt.
How the Market Works
“There’s two kinds of stock market investments, you have short-term and long-term,” said Gabriel Stark, a trader who got into the stock market to gain more financial stability and income for himself and his family. “You basically invest in something, hope it grows within a day or a couple of days and then you take your money out when it’s high. And then a long-term is you investing money and then just leaving it there and having faith that the stock that you invested in would give you large returns over a long period of time.”
But there are also other, more complicated types of investments that were used during the GameStop events. Say someone borrowed a video game (perhaps purchased at GameStop) and decided to sell it online for $10. After some time, they notice that the price for that game has dropped to $6, so they decide to buy the game back, essentially making $4. Then they will give the game back to its owner, having made money off of it. This is what the hedge funds did against GameStop, a process known as short selling.
Now, say someone borrowed the same game and sold it online for the same price. Instead of going down, the price goes up to $50. They might have not enough money to buy back the game and give it back to its owner before the price goes up farther to $100, exacerbating the problem. This is what the Reddit traders did against the hedge funds, a process known as short squeezing.
The Traders’ Motives
The GameStop events may have shown the true extent of the animosity the so-called “99 percent” has against Wall Street’s one percent. But much can be said about the traders’ approach to bringing economic equality by buying and selling stocks. For Stark, he doesn’t seem to be convinced. “The hedge fund traders have mostly established money for many years, it won’t affect them,” he said. “This plan of attack will most likely affect GameStop as a business because it’s as fast as the stock price inflated. That’s as fast as it will drop and can possibly put the company out of business and cost a couple thousand people their jobs.”
There’s also the fact that WallStreetBets is led by some of the very wealthy people its users look down upon, including its founder Rogozinski, who currently lives in a gated community with his wife and twin boys in Mexico City. There are also the hedge funds that actually made money during the events, which doesn’t surprise Stark. “The hedge funds that made money during the stock surge were paying attention to Reddit users they were watching. They saw the plan ahead of time,” he said. Sherr recounts one hedge fund in particular that was profiled by the Wall Street Journal, which said they made hundreds of millions of dollars during the surge. “They benefited from the stock going up because they realized that this was going on,” he said. Sherr also believes that if anything, the traders became a tool of the market. “At the end of the day, the market acted exactly as it normally does,” he said. “But what was interesting is that this was happening on social media in real time and involving traders who are not normally in suits. That was really what made a difference.”
But this does raise the question of why the Reddit traders went after stock shorting and attacked hedge funds in the first place. “There’s this narrative on Reddit that hedge funds are evil, and that short selling is evil,” Sherr said. According to Stark, the traders did not like the idea of wealthy people deciding whether a business gets to stay open or not. “The power to close a business through insider stock trade is an economic imbalance and morally wrong,” he said. However, Sherr said that hedge funds actually help sometimes uncover bad behavior. He said how they were able to predict the 2007–2008 financial crisis, and get dietary supplement organization Herbalife to restructure its business after being exposed as a pyramid scheme. “I’m not making a value judgment one way or another,” he said. “But it’s very easy when you follow just the CEOs of companies who like Elon Musk, for example, who said short sellers are evil, and he says it over and over and over and over again.”
Economic Equality, Or Not?
Despite all this, the traders at least seemed to be on to something, given how the hedge funds complained about the money they had lost. However, to say that the GameStop events was about addressing economic inequality isn’t entirely true, and that if anything, represent the problem, according to Stark. He argues that this was due to the losses the hedge funds suffered, and that no one likes being beat at their own game, even if they may have been in the wrong to make companies like GameStop go bankrupt. “I don’t think that GameStop in particular is a huge part of that,” Sherr said. “I think, at the end of the day, five years from now, it’ll be a blip. It’s an interesting book.”
But if the problems with the economic system have little to do with short selling and hedge funds, what are they? In a series of data sets from the Pew Research Center on economic inequality in the U.S., up to 45% of Americans believe that the outsourcing of jobs to other countries and the tax system are the two biggest contributors. Up to 66% of Americans believe that much of the responsibility in reducing inequality falls back on the federal government, while 64% believe it falls back on large corporations. 83% of Americans believe education and job training are more effective solutions than direct assistance to the poor. 84% of Americans believe taxes should only be raised on the wealthy, while 86% of Americans believe that taxes should not be raised on other people.
There are also racial and gender disparities to consider. In an interview with San Francisco Federal Reserve President Mary Daly for an April 2021 issue of Barron’s, Daly said that economic output in 2019 would have been as much as $2.7 trillion greater if such disparities were eliminated. “A lot of it is based on who came first. Whoever gets to the top first can decide to either help their fellow man in creating a financial prosperity for all,” Stark said. “Or they can put limitations on how far the next person can go in the economic food chain based on their own preference. Which plays across the board against women, men, people of different ethnic backgrounds and currently people of different gender and sexual orientation.”
Stark also said that sometimes people, rather than the system itself, is the issue. He compares it to a skewed interpretation of the Christian rule to “love thy neighbor”, in which people can decide which neighbor they want to love instead of all people. “So, the hard question is, is the economic system broken or is it the people running the system broken?” he said. “And as long as there’s an imbalance or injustice, there will be groups of people like Reddit traders who want to change the economic landscape.”
The Quest Continues
GameStop could prove to be not so much an isolated incident as it is the start of a movement. This is indicated by the rally behind the cryptocurrency Dogecoin, which began on April 20 and was also triggered by Reddit traders. “Dogecoin is another similar event where there is a group of Reddit traders who are trying to push forward and against the economic normality that has been placed over the last hundred years,” Stark said.
If this is truly the case, then the movement could evolve until it truly becomes an effective way of addressing economic change. “That’s what every social movement is, right? It’s a bunch of people coming together and making a lot of noise and hopefully making change,” Sherr said. “That’s what it has been throughout all of history.” Stark too, seems to agree. “The GameStop events are a form of economic and digital protest, and whenever there’s protesters, change is soon to follow if history serves us right,” he said. “As long as people’s willing to fight for a different system there’s going to be a change.” Perhaps Chohan describes it best when he says that for as long as there are socio-economic issues, tactics such as these will continue to have wide appeal.
Looks like David may be able to slay Goliath for good after all.
