GME Endgame: The War Between Melvin Capital and Wall Street Bets
And why the future of American capitalism may hang in the balance
** UPDATES AT BOTTOM OF ARTICLE! (12:40 EST, 1/28)**
As I write this first line, it is 1:41 P.M. EST on Tuesday, January 26th, and GME — the stock of retail video game seller GameStop — is flying past $115. It was at $100 at the start of the hour, $88.56 at the start of the day. That’d be great news for the average investor on a long call, but today is anything but average. For the traders driving this surge, they want $1000 per GME or nothing, total victory or crushing defeat. They just might pull it off, and they only need to bankrupt a multi-billion-dollar hedge fund to do it.
If you haven’t heard of this yet, let me set the stage:
GameStop has seen years of declining sales, due primarily to online retailers like Amazon and the rise in popularity of game downloads on new-gen systems. Amid the COVID-19 pandemic driving down retail sales, many people have been expecting the company to go the route of Blockbuster Video and fold completely. Among those betting on GameStop’s failure is a 12.5-billion-dollar, NY-based hedge fund called Melvin Capital. They placed an insane number of leveraged short calls on GME, until the stock had a staggering 140% short ratio.
For the laymen among us, a short is a wager that a stock price is going to fall. You borrow a stock at market price with a contract that states you will buy the same number of shares at a later date. If the price goes down, you buy the same shares at a lower price and the price difference from the original shares you borrowed becomes your profit. The reverse is also true: if the price goes up, you’re on the hook for the entire increase in price.
In a popular subreddit called Wall Street Bets, independent traders saw an opportunity in the massive scale of the GME short calls. If they could convince enough of their fellow Redditors to buy GME stock, a “short squeeze” could be triggered. Pushing the GME price higher would force the leveraged financial institutions like Melvin Capital to hedge their bets by buying the common stock at a higher price, thereby driving the price up even further, creating a snowball effect whereby massive amounts of short calls could be liquidated and the GME price fired into the stratosphere. That’s exactly what they did. After a campaign of meme posts rallying the troops (like this one), the WSB army sent the stock skyrocketing by 400%. By Monday, Melvin Capital had lost more than 30% of their holdings — more than $4 billion. By now, they’ve lost even more, and they had to be bailed out by funds Citadel and Point72, who provided $2.75 billion to bolster the line of short calls.
Now an all-out war is underway, and it’s winner-take-all. If the Wall Street Bets people can inject enough capital and outlast the hedge funders, they can succeed in liquidating all the shorts, bankrupting Melvin Capital, and sending the GME price near or over $1000 before selling it back toward reasonable levels. If they cannot maintain the upward momentum, the meteoric rise will be followed by an equally dramatic, preemptive fall, and Melvin Capital will recoup their losses as scores of amateur traders are left destitute. It’s an amazing thing to watch: a Superbowl for the self-described “retards” of Wall Street Bets.
This short squeeze is not just pushing one hedge fund to the breaking point, it’s sending a message to the whole spectrum of traditional financial institutions that independent retail investors, usually the stooges for big money market engineering, are now becoming a force to be reckoned with and are capable of exerting their own will in response. For big money, this is a problem, and whether or not they lose this battle over GME, you can be sure they don’t plan to lose a larger war.
They’re going to play dirty, and they’re going to do everything they can to get Wall Street Bets banned from the internet.
— — —
WSB has always been an anomaly. I own no stocks and am too cowardly to start, but I have long enjoyed WSB’s antics for the pure, offensive comedy of it. Users who profess their market pessimism are known as Gay Bears. The whole lot of them proudly, if offensively, refer to themselves as retards, and those who make brilliant or outlandish calls are elevated to the status of “autists.” A reckless bet is a YOLO, which can also be used as a verb. When users try to speak of fundamentals, they are routinely told, “Sir, this is a casino.” When users gamble away their life savings, the community encourages them not to “go all in on $ROPE calls”; i.e. Don’t hang yourself.
Perusing the subreddit on any given day of 2020, it was hard not to feel like the stock market was in the midst a serious bubble. Elon Musk became a sort of Pope. Federal Reserve chair Jerome Powell, who authorized the printing of money to save the market from collapse at the beginning of the pandemic, became a living god. Printer go Brrrrr, was the meme of the month. “Stonks only go up!” has become the WSB rallying cry.
The general atmosphere is not dissimilar from the 2017 cryptocurrency craze, which saw thousands of upstart companies raise millions, even billions of dollars with vaporware, only to come crashing back down to zero or near-zero in the ensuing months and years. Like “Stonks only go up,” the rallying cry of every crypto subreddit was HODL!!! — hold — the implication being that crypto only goes up, that one need merely buy some random altcoins and wait patiently to become a millionaire. Despite bitcoin and ethereum recently reaching all time highs, HODL was not a realistic strategy for the average trader, and you can be sure that many of the “diamond-handed” HODLers eventually went all in on $ROPE, to use the parlance of our times.
But boom and bust cycles always happen, and there will always be winners and losers. What makes this new situation different, particularly in light of this epic GME showdown, is that there is now a concerted effort to paint the WSB traders as the primary manipulators of an unstable market and not merely an absurd but natural part of it. If this is indeed a bubble — and that bubble pops — you can be sure the blame will be placed squarely on the shoulders of “young” or “inexperienced” retail investors, college students with Robinhood accounts, and the WSB community specifically. Lost fortunes, lost retirement accounts, and lost college funds will be blamed on these alleged market manipulators and ignoramuses, who are somehow considered too stupid to tie their own shoes but also too clever and nefarious to be allowed to organize.
In an article for Time, Alex Fitzpatrick suggests that the WSB community is comprised of sheep, all of whom are being manipulated by wealthy day traders into throwing their money at the stock that would benefit those cynical shepherds the most. He compares the subreddit to the cult of “QAnon” and refers to an “angry mob” that allegedly harassed the management of Citron Research, who were planning a live stream to discuss GameStop’s dubious fundamentals.
This comparison with “angry mobs” and right-wing conspiracy theorists is not insignificant. In the two weeks following the January 6th Capital riots, QAnon accounts were purged en masse from Twitter, Facebook, and a litany of other platforms. Google, Apple, Amazon, and other major players worked in lockstep with social media companies to remove right-leaning conspiracy content, even wiping the conservative app Parler from existence. The reason, perhaps justified, was that the conspiracy theories being peddled were demonstrably false and were leading to real-world violence and political instability. Now, by comparing WSB to a violent cult that has effectively been banned from the internet, Fitzpatrick and other commentators are sowing the seeds which would lead to WSB’s own condemnation and expulsion.
The crucial difference here, of course, is that WSB does not traffic in dangerous conspiracy theories. It does not encourage violence. It is not led by some shadowy pseudo-messiah but by a decentralized network of 2.4 million self-described “retards.” The subreddit is simply a social forum for casual stock traders. That these interconnected traders might cooperate with each other is an inevitable result of free speech and free market capitalism, and to ban them for doing so is to suggest that free speech and the stock market are incompatible, that organized stock trading should be the sole right of moneyed institutions who operate behind closed doors, not the general public, operating in plain sight.
In the same article, Time’s Fitzpatrick writes: “While many of those getting in on the GameStop action are clearly seasoned day traders, the chaos is just as likely attracting people willing to put too much on the line without really knowing what they’re doing, and could be too slow to react to a price crash.”
This sentiment reinforces the idea that WSB subscribers are victims of their own stupidity, that rules should be put in place to protect the “Average Joe” or “inexperienced trader” by preventing them from communicating or from influencing in any organized manner. In a similar vein, Jim Cramer, CNBC’s “Mad Money” charlatan who once admitted on camera to criminal trading practices, made a point to imply criminality on the part of WSB. After making it clear that GME’s price valuation has become completely divorced from the underlying reality of the company, he went on to say,
“Look, I think the longs have every right to make their case. If you like a stock and you want to cheerlead, more power to you. Nothing is wrong with expressing your honest opinion as long as you’re not making fraudulent claims or pumping and dumping, which is a crime and the government will pursue the fraudsters.”
While he says it with an air of impartiality, he’s implying that WSB’ers are not trading based on their “honest opinion” of the company and that this GME short squeeze is really a pump and dump after all. He advises his viewers to tread carefully, because “you never know who Wall Street Bets will target next,” as if Wall Street Bets is a network of ninja assassins rather than an easily accessible, non-exclusive internet forum. One of Cramer’s guests went so far as to suggest that “a foreign power may be involved,” as if this whole GME saga might just be Russiagate 2.0: Putin YOLOs $5 billion at a meme stock to piss off a hedge fund.
The media, Cramer included, wants to believe (or wants you to believe) that the gains of these rag-tag traders can only result from possibly-criminal market manipulation or from blind luck, and that their losses are those of impressionable youths being swindled by thieves. Most of the WSB’ers might at least agree with the blind luck part, but that’s aside from the point. People want to paint a public internet forum as a fundamentally unnatural, illegal, immoral, or otherwise harmful subculture in stock trading, and the result will likely be that the whole community gets banned at some point in the near future.
Okay, you say, but why should I give a shit? Who cares if a bunch of so-called retards get their precious internet club taken away? I care, for one, because the motivation behind banning WSB would be as telling as the banning itself. It would be a significant symbolic and practical milestone on the road toward a modern American variety of fascism.
If that sounds absurd, consider that fascism is a uniquely capitalist system in which government and corporate authority collaborate to aggregate wealth in the hands of the powerful. As political scientist Michael Parenti wrote in his 1997 book Blackshirts and Reds,
“If fascism means anything, it means all-out government support for business and severe repression of antibusiness, prolabor forces. Is fascism merely a dictatorial force in the service of capitalism? That may not be all it is, but that certainly is an important part of fascism’s raison d’etre, the function Hitler kept referring to when he talked about saving the industrialists and the bankers from Bolshevism.”
The Robinhood traders “YOLO’ing” their allowance money into meme stocks are not exactly Bolsheviks, but the point remains the same: in fascism the rules are changed to support the elites and Big Business, to prevent the working class and the average citizen from claiming or exercising any power over market forces. The distribution of wealth in the United States is already as lopsided as any civilization in history, and the people in power will aim to keep it that way in any way they can. In my opinion, losing WSB would be a big blow to the free market, to free speech, and to democratic control over market forces.
Parenti writes, “Fascism is nothing but a final solution to the class struggle, the totalitistic submergence and exploitation of democratic forces for the benefit and profit of higher financial circles.” If that’s the case, then it’s clear that the submergence of Wall Street Bets (an undeniably democratic market force, where 2.4 million independent people share their opinions without the direction of any centralized entity) for the benefit of centralized, elite entities like Melvin Capital (who already have all the power and, well, capital) would be a significant step on the road to fascism and a generally bad thing for virtually every person who isn’t a hedge fund manager.
And that’s why I say SAVE WALL STREET BETS! GME TO THE MOON!
GME’s at $147 now, as I write this final line. I should mention again that I don’t own a penny of it… and also that nothing in this article should be taken as financial advice.
Anyway: Good luck, retards, and Godspeed.
UPDATE (12:40 EST 1/28):
Yesterday at 6:00 P.M. EST, after a day of trading that saw GME run up over $400, the Wall Street Bets Discord page was banned, supposedly because of hate speech.
Shortly after, the Wall Street Bets reddit page was made private, leading many users to think it had been banned as well, since long-time users needed to be manually added by moderators in order to enter the subreddit.
After re-opening the sub, moderators released a post explaining that the temporary closure was to put auto-mod settings in place which would block hate speech and particular “bad words.” By blocking certain forms of hate speech automatically, they hope to take away the same excuse which led to the banning of the Discord server.
On Wall Street Bets last night, after the re-opening of the subreddit, the mood was exuberant and defiant. After tremendous gains in the day’s trading, an influx of a million new users in less than a week, widespread media attention, and almost unilateral support from casual spectators across social media, it seemed they would enter today’s market with strong momentum and a surge of new buyers. Today would have been the day that the shorts were crushed and GME sent to $1000. Instead, trading platforms stepped in to rig the game.
This morning, several platforms froze trading on so-called meme stocks (Nokia, BlackBerry, AMC, Bed Bath and Beyond, and GameStop). While this was done under the guise of helping to “reduce risk,” it was clear that they only intended to reduce risk for those hedge funders who were losing billions, not for the retail investors who were making wild profits. In order to benefit the shorters, Robinhood blocked all buys on GME and AMC but still allowed the stocks to be sold. The obvious effect was to dump the price dramatically for the benefit of the shorters who, until that point, were being trounced. It certainly didn’t reduce any risk for the retail investors, who watched as their stock plummeted by over 50% (as low as $126 from a previous day high of $469) due to direct market manipulation.
The excuse being peddled by Robinhood and others is that the stock was overbought, that more shares were tied up in long-calls than were actually available to buy and sell. The only way to remedy that, they claim, is to disallow buying. It’s certainly peculiar that they didn’t share the same concern when the situation was reversed. When the shorts outweighed the number of shares at a ratio of 140%, nobody stepped in to block selling and only allow buying. It’s a bullshit excuse, and what’s happening now is a clear attempt to protect Big Money at the expense of independent traders. Market manipulation for the powerful is seen as protecting the market, while unity amongst retail investors — at the expense of the powerful — is seen as dangerous if not criminal.
If there was any illusion that the trading halts were being done for the health of the market or to protect ordinary investors, Robinhood has now locked buying on more than just GME and AMC. Nokia, Bed Bath and Beyond, and Blackberry are locked too. Selling, of course, still welcome. Any stock where retail investors are making massive profits at the expense of legacy traders, the rigged market will step in to level — er, skew — the playing field.
More that half of Robinhood’s users own stock in GME or AMC, so it’s unclear to me what their motivation was in trying to screw over this huge swath of their user base. Perhaps they were pressured by the SEC or felt that they needed to act preemptively to avoid SEC pressure. Perhaps they were bribed or blackmailed directly by hedge funders to bail them out of this catastrophe.
Robinhood has long profited from selling the trading data of their users to hedge funds. They assist hedge funds in screwing over retail investors by giving the hedge funds inside information on the types of orders Robinhood users are making. It’s certainly ironic that the same strategy, more or less, has now been turned against those same hedge funds, but it’s also clear that the events of the last week might jeopardize Robinhood’s relationship with their hedge fund buddies. Robinhood users in the course of a week have cost the hedge funders likely more money than they stand to make from buying those same users’ data. Now it seems that to protect their own profits, Robinhood is being forced to show where their loyalties lie. Spoiler alert: it’s not with retail investors or their user-base. It’s with the hedge funds.
Steal from poor, give to the rich. That, evidently, is the Robinhood way.