• Cheryl Hurst

Reddit and GameStop: the very basics

With an interest in how we form and use groups to create a collective voice, the recent news about Reddit, GameStop, and the Stock Market left me with more questions than answers. If you're still a bit confused about what exactly has happened, here is a quick (low jargon) explanation of how Reddit users cost hedge fund managers billions of dollars in just a few days. This information is based on my own personal interest and all views are my own.

Reddit and Collective Action?

If you’ve not been following recent stock market news then it might come as a surprise that this week Wall Street witnessed the power of organized online collective action, where users of an online platform called Reddit cost hedge fund managers billions of dollars.

It’s not the first time the users of the site have leveraged their collective power to mobilize and create change. In 2015, there was a Reddit ‘blackout’ where over 2,000 moderators shut down their online communities, effectively preventing millions of users from viewing and adding content[1]. This protest led to successful negotiations between moderators and the company for better working conditions and is one of several examples of the bargaining power online users have to create platform-based change[2]. It also provides useful insight into the labour exploitation involved with online content moderation[3].

The situation between Reddit and GameStop is slightly different. While users weren’t fighting to enhance their conditions, something we would normally expect with the term ‘collective action’ when discussing labour market conditions, they did ‘take a stand’ against major Wall Street players through grassroots organization.

Context: Reddit and Short Sellers

To provide context for how Reddit users united to cause a stock market distortion – Reddit is an online/app-based networking site that aggregates social news and encourages discussion. There are approximately 330 million users on the platform. Within the platform you can create “subreddits” (individual threads or forums for discussion). In a subreddit called “r/wallstreetbets’, 2.5 million users participate in discussions about stock market trends and strategies**. The subreddit has been active for over 8 years. Many would consider the users to be risk tolerant (they make and suggest big financial decisions based on discussions).

The subreddit received substantial media attention at the start of last week because of how its users drove up the stock price of GameStop, an American video game and gaming merchandise retailer. Contributors to the subreddit, “an army of small investors,” used the platform to convince members to buy GameStop stock, which increased its overall market value. By ‘convincing others,’ we’re talking about posts by individual users that directly told other users to buy stocks in GameStop in order to drive the price up. At the time, major hedge fund investors were shorting the stock, meaning that they were betting on the stock price going down. As Redditors bought more stock and drove the stock price up, those short positions started to lose money.

Effectively, if someone thinks the price of a stock is going down, they can ‘short’ the stock: they sell the stock first in hopes of buying it back at a lower price. This sounds backwards because it is, and the way it works is that the ‘short sellers’ have to borrow the stock from someone else in order to sell it. These Reddit users, having driven the stock price up, are now making it nearly impossible for short sellers to make money and are even forcing them into accepting big losses. The short sellers have little chance to buy back the shares at a lower price and are instead forced to buy them at higher prices. This is a 'short squeeze' and is happening with GameStop as short sellers try to cut their losses. As short sellers buy the stock when it's high, it sends the price even higher - essentially forcing other short sellers to also buy.

Normally the demand for stock is driven by investors’ expectations about how well the company is and will be doing in the future. GameStop is a common example – it is a brick-and-mortar chain competing against online game retailers – therefore many of these hedge funds think that the prospects for the company are poor.

Why GameStop?

At the beginning of 2021, speculation in the subreddit grew that because of a new board member recruitment (co-founder of Chewy, Ryan Cohen), the company would be better positioned to fight in a digital marketplace. While this recruitment may have been promising, it’s unlikely that it would have led to substantial increases in the stock market price without the help of the aggressively buying Reddit users. For more context, GameStop’s stock was worth $20.99 only one month ago and at the time of writing this post it’s as high as $333, showing an increase of around 1500%.

Although there’s no one reason the subreddit users decided to target GameStop, it’s clear that many users were intentional in their driving up of stock price at the cost of ‘Wall Street’ (hedge fund managers). The users have been called "a gang of online pranksters" and many have planned to hold their stock and not sell. As of today, major Wall Street players have been forced to close their positions – costing losses in the billions, while many Reddit users have made a hefty profit.

This use of Reddit for organizing individuals towards a collective goal may not be new, and indeed we are seeing similar trends in the stock of other low-valued companies, but it does speak to individual user power on online platforms. This mobilization of user voice offers us a springboard for understanding what makes users organize to exert their power – and what that power can do when properly leveraged.

This is not a detailed or exhaustive explanation of what's happened or the repercussions, but it hopefully gives you enough information to know what is going on. This post is by no means meant as encouragement for purchasing or trading stock, and should not be taken as such.

** This post does not advocate for the use of Reddit, or other similar online platforms, as an informational tool for making stock market or other financial decisions. Many users on the platform purposely share misinformation or damaging financial advice, and decisions should not be made from its content alone.

[1] Matias, J. N. (2016, May). Going dark: Social factors in collective action against platform operators in the Reddit blackout. In Proceedings of the 2016 CHI conference on human factors in computing systems (pp. 1138-1151). [2]Isaac, M. (July 2015). Reddit Moderators Shut Down Parts of Site Over Employee’s Dismissal. The New York Times. [3] Arsht, A., & Etcovitch, D. (2018). The human cost of online content moderation. Harvard Law Review Online, Harvard University, Cambridge, MA, USA. Retrieved from https://jolt. law. harvard. edu/digest/the-human-cost-ofonline-content-moderation.

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