GameStop enjoyed one of the strangest months in the history of the New York Stock Exchange. GME (the stock ticker) started the month trading at $17.25, before rising to an unprecedented $371.82 at 9 a.m. CST on Jan. 27. It dipped considerably following this high, hitting $53 at market close on Feb. 4.
The reasons for this average down are complex, but the main catalyst occurred on Jan. 28 when Robinhood, one of the most popular retail brokers in the U.S.; TDAmeritrade; WeBull and several European brokers placed restrictions on the buying of certain securities, including GameStop, AMC and BlackBerry.
GameStop had this unsustainable growth due to a multitude of market forces, but the interest originally started on r/WallStreetBets, Reddit's most popular investing forum. Eagle-eyed users noticed GameStop's "float," or number of outstanding shares subtracted by number of restricted shares, was heavily shorted by large institutions and hedge funds.
Shorting is not a new thing in the market and occurs when shares are borrowed at a certain price, with the promise they will be given back, and the position taker sells them, hoping to buy them back (or "cover") at a lower price.
GameStop's short interest, or how much of the float was shorted, reached a nearly unprecedented 140%. Investors, most of them retail, attempted to cause a "short squeeze," where enough shares are bought and held, so the short owners are forced to cover at unfavorable prices, causing another massive spike in price. An example of a short squeeze brought up by many on the Subreddit is Volkswagen in 2008, where the stock price rose quickly from €200 to €800 in European markets.
According to Tom Miller, professor of finance at Mississippi State University, the ability to use newer technology like smartphones and tablets for retail trading compounded with the communication on Reddit eventually led to GameStop's spike.
"This was the culmination of retail traders having the ability to trade from their smartphones, tablets, computers and talk to one another on places like Reddit," Miller said.
While many retail traders were highly perturbed when popular retail brokers restricted these securities, Miller remained neutral.
"Most likely, the brokers were acting fiduciarily responsible, but I don't know that," Miller said. "That's why we have to investigate this whole sequence of events from when the stock was trading at $20, to $30, to the last 10 days, when it has gone all over the place."
Is this retail revolution here to stay? Miller believes so, saying that advance software and continued communication will contribute to that.
"Yes. We have better software, platforms to trade and exchange information than we did during the Dotcom Bubble, so it'd be hard for me to believe that technology won't keep improving. And while we don't know how many of those Reddit subscribers were actually investors or just onlookers, it's here to stay regardless," Miller said.
Alvaro Taboada, associate professor of finance, tends to agree with Miller's statements.
"I think it represents a shift in markets and trading overall. It's not the first time something like this has happened, but it is the first time it has become such a massive, public event, where trades made by retail investors drove a stock price up so much," Taboada said.
Taboada also agreed with public sentiment that Robinhood and other brokers might have made a miscalculation when restricting securities.
"Robinhood especially promoted the little guys being able to participate in markets. They went against what they were promoting. In my opinion, that should not have been done," Taboada said. "They had their reasons though, valid or not."
Will the infinite short squeeze many on WallStreetBets are hoping for happen? Taboada is not so sure.
"The short squeeze has happened, to some degree, and the hedge funds that didn't get wiped out or incurred massive financial troubles have already gotten out and may be waiting to get back in at the opportune time," Taboada said.
Shye Link, a senior at MSU and dual major in finance and business economics, thinks these Reddit traders got caught up and perhaps got too greedy.
"It became this euphoria. So much of finance is behavioral, and when three million people are buying a stock and telling people to buy, it shoots up to a price that is not connected to reality. This is not a company that is doing well, especially during COVID," Link said.
Link also commented on the power of communication in starting a retail trading revolution.
"There's power in people coming together and saying, 'Hey, let's buy this' regardless of the valuation, regardless of the fundamentals," Link said.
Link also emphasized how important it is to learn solid investing instead of just pure speculating.
"You have your whole lifetime to invest, and you're always going to have these opportunities to speculate," Link said. "Time is one of the most salient things in finance."