At the start of 2021, no one would have suspected GameStop, then seen as a shopping mall relic, was about to embark on a vertiginous rally that would reconfigure Wall Street’s power dynamics.
But by the end of January, mass internet fervor had driven the company’s stock price to $325 from $19 at the beginning of the month. Today, it still floats around $160, representing an eight-fold jump since the start of its trading frenzy. Propped up by a cadre of passionate retail investors dead set on hodling, the stock has defied the gravitational pull that eventually brings hyped-up public companies down to values in line with their business realities.
Nearly a year after the WallStreetBets communities on Reddit and Discord orchestrated a massive short squeeze on GameStop shares, analysts and experts say the ordeal has not fundamentally changed the mechanics of Wall Street. But the rise of the retail trader, and the potential for mass-coordinated buying and selling schemes around popular meme stocks like GameStop, are here to stay.
The meme stock craze is a byproduct of a wider retail investor boom that has seen millions flood the stock market after brokerages introduced no-fee trading. Ten million people opened brokerage accounts in the first half of 2020, according to estimates from JMP Securities.
Brokerage apps like Robinhood, in concert with investing communities on Reddit and Discord, gamified stock trading and attracted a new cadre of investors with a different agenda than the traditional institutional investor, or day trader.
That explains how GameStop, a flagging brick-and-mortar video game seller, became a meme stock. Some redditors, including financial analyst Keith Gill, known as DeepFuckingValue and RoaringKitty, had been arguing since 2019 that the stock was undervalued because Wall Street didn’t understand the company’s role in the video game industry and its potential to reinvent itself. In 2021, they went after institutional investors betting on the opposite by shorting more than 100% of GameStop’s shares. The historic short squeeze that ensued reframed popular conceptions about retail investors: They are now seen as a contingent that can operate with numbers and force.
“The good news is that Robinhood and WallStreetBets and Reddit have energized retail investors and have brought a lot of people into the market,” said Michael Pachter, a GameStop analyst at Wedbush Securities. “But the bad news is that they are generally uninformed investors and they are playing trends—and that generally ends badly.”
Not only are there more retail traders, but they are also behaving differently. The retail trading boom has popularized more complex and riskier financial investments. “Many of these investors are now familiar with trading on margin, trading in options, they understand shorting,” said Kelly Shue, a finance professor at the Yale School of Management. “They’ve become in some ways more sophisticated, but also much more highly leveraged.” Shue thinks that widespread retail margin trading could eventually create more volatility in the market.
Meme stock mania has also changed how other stock market players act. For example, movie theater company AMC Entertainment, whose stock has surged more than 600% since the start of 2021, has addressed its meme status head-on, something GameStop has been loath to do. CEO Adam Aron frequently tweets to rile up his investor base and engages on long earnings calls where he takes questions from the masses. He even doled out free popcorn.
Aron treats AMC stock like a consumer product because, well, it is. While institutional investors usually hold the majority of a stock in any given company, retail traders own a whopping 70% of AMC stock. And Aron isn’t just gunning for a higher stock price: He and the board have repeatedly issued more stock over the past year, signaling they believe it’s overpriced.
Meme stocks haven’t fundamentally changed short-selling on Wall Street, but institutional investors have been more reluctant about publicly disclosing—let alone flaunting—short positions for certain stocks, especially if they’re nostalgia brands like many of the meme stocks (for example, GameStop, AMC, BlackBerry, Bed Bath & Beyond.)
“Shorts are learning to be more disciplined about getting out of their positions when things are moving against them,” Pachter said. “And I think the real smart shorts are like ‘Don’t buck the apes. Don’t fight the apes.’ Because the apes aren’t always behaving rationally.”
The newfound attention on short-selling might have alerted regulators to take a closer look at the practice. A newly proposed rule from the US Securities and Exchange Commission could require greater transparency in reporting “securities lending” activity. Short sellers essentially borrow shares from lenders, sell them, and try to buy the stock back at a lower price. The new rule would require those lenders to report the loan to a third-party like the Financial Industry Regulatory Authority (FINRA,) which would make the disclosure public.
The Justice Department is also investigating the relationship between short-selling hedge funds and research firms to determine if they engaged in illegal behavior. The news thrilled meme traders, many of whom believe shorting is predatory.
Jaime Rogozinski, who founded the WallStreetBets subreddit in 2012 as a place to discuss ambitious—even risky—investments, described meme traders’ arrival to the markets with a simple analogy:
“If you’ve been sitting at a poker table with eight people for 50 years and they’re all really good at the game, and then the drunk guy comes and sits at the table…and all of a sudden he goes all-in on a deuce-seven, not because he’s bluffing, but because he thinks he’s got the best hand, that screws up your game,” says Rogozinski who is no longer part of the group.
“Everyone is still playing poker, all the players are still there, but when the drunk guy makes a move, you need to understand that this person’s logic is different. This person’s logic may even include, ‘I don’t care if I lose.’ That is impossible to fight against.”
Meme traders might not have upended Wall Street, but they have sent a clear message: Ignore us at your own risk.