What you need to know
Individual investors are fighting against the potential efforts of Wall Street to profit by exploiting and even worsening the economic misery of Covid-19, as it did during the 2008 financial crisis.
The idea of social media as an effective way to rally people around a cause for collective action is not new. The Arab Spring, Black Lives Matter, and other protests against political injustices may not have transcended borders if they had not relied on social media platforms to spread their messages.
But it has not, until the past few days, been used in a coordinated way to marshal the voices of the common people into action in the financial world. Keith Gill, a widely followed YouTuber, helped spark the GameStop frenzy by pushing up its stock prices. The attempt to stop short selling, shocking established investors, is the first known case of a titan of Wall Street being defeated, at least temporarily, by a motley band of Redditors.On January 26, Melvin Capital Management, the hedge fund that bet against GameStop, closed out its position after losing 30% of its assets.
Short sellers are the target for Reddit investors. To short sell a stock, an investor borrows it from a shareholder, sells it, and buys it back when it drops in price. The investor can then profit from the fall after returning the stock to the lender.
During the 2008 financial crisis, retail investors suffered steep losses while short-sellers were raking in billions in profits. U.S. authorities tried to rein in short-selling by imposing a temporary ban in September 2008, but it was far from enough. Some Redditors were motivated by a desire to exploit Melvin Capital’s vulnerability to a rise in GameStop share prices.
In addition to taking on short sellers, Redditers also wanted to save GameStop from demise. For many of them, the game retailer chain has led them into gaming, and they looked to fight against Melvin’s attempt to destroy GameStop’s business, which is dying as companies have been selling digital versions of their games. In the hope of saving struggling companies, retail investors have also fought short-sellers by turning them into “meme stocks.”
Put together, the Reddit investors are engaging in a fast-moving, extreme form of “value-based investing.” Increasingly, young investors, constituting the general demographic of Reddit users, favor firms that adhere to Environmental, Social, and Corporate Governance (ESG) values, not just growth potential.
Yet the battle against short sellers shows that these investors are not only concerned about investing in companies that have a great track record on labor rights or environmental protection. Investment ideologies are now expressed as an opposition to concentrated financial wealth in the hands of well-connected Wall Street institutions at the expense of regular people who buy stocks. Individual investors are fighting against the potential efforts of Wall Street to profit by exploiting and even worsening the economic misery of Covid-19, as it did during the 2008 financial crisis.
The battlefield on which organizing this value-based opposition to these Wall Street Goliaths takes place is social media. Just as Facebook and WhatsApp users gather to speak against and then topple unjust governments, Redditers threaten to do the same to the likes of Melvin.
For the first time, millions can be quickly and effectively organized to pool together financial resources that match or even exceed that of established hedge funds. Social media, used as such, threaten the monopoly of Wall Street in its ability to sway stock prices.
Of course, it is premature to say that the rise of social media-organized retail investors has led to the “democratization” of financial power. As social media platforms amplified conspiracy theories and fake news, they can also manipulate retail investors to follow the orders of financial demagogues seeking to make a quick buck by peddling misinformation.
The continuing saga surrounding GameStop has already gone beyond fighting against Melvin. It has become a bubble that has drawn in ever more speculators seeking fat returns. These opportunists seek to hijack the Wall Street-fighting agenda of Redditers, as dictators came out on top in the aftermath of social media-organized pro-democracy protests of the Arab Spring. Furthermore, the fight against short sellers can also be upended when online trading platforms that retail investors depend on abruptly cut them off.
Despite the risks, the GameStop craze has brought new power dynamics to the investment scene. Wall Street professionals are now rushing to social media for future signs of grassroots actions that can jolt the stock market.
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TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
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