Game Stop - Wall Street Bets

Meme War: The GameStop Short Squeeze Campaign That Gamed the Financial Algorithm

By
Sandhya Jetty, Teresa Chen, Rehan Mirza
Published on
December 16, 2022
Media Manipulation Tactics Used
Copypasta
Evidence collages
Keyword Squatting
Memes
Swarming
Viral sloganeering
Date Range
January 11 - March 17, 2021
Region
USA
Network Terrain
Discord
Instagram
Media outlets
Reddit
Twitter
YouTube
Attribution
Networked faction
Target
Not applicable
Strategy
Distributed amplification
Gaming an algorithm
Meme war
Vulnerabilities
Inconsistent regulatory enforcement
Public directory
Observable Outcomes
Financial gain
Recognition by target
Mitigation
Account suspension
Campaign Adaptation
Tactical redeployment

Overview

From January 4 to January 27, 2021, the share price of GameStop (GME) rose from $17.25 to a high of $347.51.1 This was an unprecedented situation, as the dramatic rise in price was the result of the collective efforts of an online community to game financial algorithms. investors on the stock-trading-focused subreddit r/WallStreetBets mobilized as a to collectively buy and hold shares of the stock with the goal of forcing institutional investors shorting GameStop to buy it back at a higher price or take losses. “Shorting” is an investment strategy that assumes the stock in question will decrease in value. In other words, institutional investors were betting against GameStop’s success; the individuals of r/WallStreetBets worked together to prove that bet wrong by driving GameStop’s stock price up. Though a principal goal of these individual investors was to financially gain from this effort, there was also a vocal desire to undermine the financial establishment and exploit the of the industry, echoing the sentiments of the decentralized Occupy Wall St. protest movement following the Financial Crisis of 2007-08 in the United States.

The forum r/WallStreetBets was central not only to the origins of this campaign, but also to its continued momentum through January and February 2021. Communications spread to other platforms, such as and for more closed discussions between individual investors, and to , , , and the press for and reactions from public figures and the institutional response. Nevertheless, given the visibility of influential posts on the subreddit, reinforced by the site’s upvote feature, and its relatively independent moderation, Reddit remained a natural home for the campaign.

The GameStop short squeeze is an example of coordinated financial market manipulation by individual investors through an online platform. The following case study details the growth in momentum of the campaign on Reddit, both in coordinating market actions on GameStop and related shares, and in spreading broader sentiments to challenge institutional investors, and the response from public figures, institutional investors and regulators, before arriving at an assessment of the environment following the frenzy.

Background

On Reddit, the online community r/WallStreetBets is a space where novice and experienced day traders can openly and pseudonymously discuss investment strategies of stocks and option trading, and share analysis gleaned from financial press or public directories. Outfitted with and investment advice, the community self-describes as “4chan found a Bloomberg Terminal.”2 The subreddit was started on January 31, 2012 by an individual investor named Jaime Rogozinski, who wanted “to fill a void for high-risk high-return trades.”3 He noted “the forums that existed were too serious, so I set up a place that was more lighthearted, that was OK with losing money.” Like any other subreddits, r/WallStreetBets has its own set of rules and moderators while users are able to post videos, memes, screenshots, and text-based discussions. It has created a subculture where redditors gather to share investment strategies with humor and online debauchery.

The meteoric rise of r/WallStreetBets to the mainstream consciousness can be traced to the GameStop short squeeze in January of 2021.4 By January 29, 2021, as the campaign was in full swing, r/WallStreetBets had more than 6 million members.5 Prior to this, the subreddit had been growing steadily from a base of fewer than 2,000 subscribers in 2013.6 In 2014, hedge funds and institutional investors began betting against GameStop, a brick-and-mortar chain that sells video games and game consoles as the gaming industry shifted to online streaming and mobile. Shorting GameStop stocks gained further momentum with the public health crisis of the COVID-19 pandemic. GameStop, as a result of the pandemic, closed 50% of its physical stores and reduced operations.7 As GameStop struggled, institutional investors shorted its stocks in anticipation of the payout that would come with the company’s demise.8

On January 4, 2021, the total short position on GameStop was 140% of its market capitalization, meaning 40% more shares were shorted than were available to trade.9 Many retail investors on Reddit believed that traditional and institutional investors undervalued GameStop. As a result, the community mobilized to collectively buy and hold shares of GameStop with the goal of forcing institutional investors to buy back stocks at a higher price or take losses.10 While some Redditors were driven by the company's fundamentals and assets on its balance sheet, others saw the movement as a shifting of power from Wall St. into the hands of ordinary people.11 Much of the mobilization echoed the Occupy Wall Street movement and sentiments from the Financial Crisis of 2007 and 2008. Redditors were eager to take down the financial establishment with the fervor of vigilantes. Hedge funds were viewed as “parasites” and “vultures,” and the subreddit r/WallStreetBets was pushed to the center stage of organizing, coordinating, and mobilizing swarm-like collective action on online platforms where individuals bought and held GameStop stocks.12 All the while, their personal savings were on the line.

Stage 1: Manipulation campaign planning and origins

The subreddit r/WallStreetBets has been known for risky bets and investments that often go against the grain of professionals and experts. Before the coordination of the GameStop short squeeze, Redditors on r/WallStreetBets discussed the performance of GameStop. Notably, a community member going by the pseudonym u/DeepFuckingValue invested in GameStop in the summer of 2019 arguing that GameStop stock valued at $8 is an unfair valuation.13 He repeatedly posted screenshots of his investment account position in the subreddit that attracted both support and dissent from community members. His posts moved from a few thousand upvotes in the summer of 2019 to eventually over 83K upvotes in April 2021.

In October of 2019, another Reddit user, Stonksflyingup posted a “shitpost” titled “GME Squeeze and the Demise of Melvin Capital” on r/WallStreetBets where he shared a meme video proposing a GameStop short squeeze with the backdrop of the TV show Chernobyl. With 70M shorted shares of GameStop, Melvin Capital was holding GameStop at $25/share. The video outlined that as the Gamestop stock price increases, the rush to cover shorts would accelerate the short squeeze.14 If GameStop stock spiked and traded at $35/share, Melvin Capital would be instantly in bankruptcy. Stonksflyingup highlighted that high net worth individuals and hedge funds would bear the losses. The post gained limited traction but planted the initial seeds for the short squeeze in the subreddit.15

Reddit Post of Video Describing the Demise of Melvin Capital
Reddit Post of Video Describing the Demise of Melvin Capital. Source: r/WallStreetBets and https://streamable.com/jon3hc.

Stage 2: Seeding the campaign across all social platforms and the web

Interest in GameStop began to surge approximately one year later, on October 8, 2020. In particular, three notable events occurred: First, GameStop’s stock price rose from $9.36 to $13.49.16 Second, u/namsilat posted in r/WallStreetBets advising redditors to buy call options (contracts that give someone the right but not the obligation to purchase a stock) for January 15, 2021.17 Finally, u/DeepFuckingValue posted a screenshot of his potential earnings from his investments in GameStop (valued at $2M+).18 Interest in GameStop continued to rise through the end of December, with many users posting about the stock in r/WallStreetBets, including some who predicted an impending short squeeze.19 Screenshots of users’ positions and memes flooded the forum in the runup to the first short squeeze later in mid-January. Analysis of Twitter data shows that the viral slogan and hashtag “#gamestonk” gained prominence around January 26, 2021 (and would go on to peak as the 12th most popular hashtag in the United States on January 2920 ) when more mainstream users and prominent accounts took notice of the stock, furthering the used to bring attention to the campaign through comedic images and slogans.21 Tweets and videos reveled in the narrative of Redditors taking down Wall Street.22 Aside from unique hashtags like “gamestonk,” organizers and participants used text blocks,23 ,24 and other forms of persuasive media in a large-scale distributed amplification of campaign goals and strategies.

In August 2020, Ryan Cohen, founder of pet-food company Chewy, publicly stated that GameStop was undervalued and revealed he held a 9% stake in the company25 . Then, on January 11, 2021, Cohen joined GameStop’s Board of Directors. This move is widely considered the trigger for the first short squeeze.26 GameStop’s stock increased by over 100% from January 12 to January 14.27 As the stock price rose, many r/WallStreetBets users posted in the subreddit, encouraging members of the community to continue buying GameStop. User /u/DeepFuckingValue’s “GME YOLO” updates–detailing his level of financial commitment to the stock–served as motivational messages to other redditors in this regard.28 As the stock price rose, the established investing community began to take note, including online stock commentary website Citron Research.

Andrew Left, investor and author of the Citron Research newsletter (who already had a contentious relationship with r/WallStreetBets, owing to his negative take on GameStop), announced that he would host a livestream to go over what was happening with GameStop on January 20. This triggered a flurry of activity.29 Users from r/WallStreetBets raided Left’s live stream and attacked him for his analysis of GameStop’s value.30 Left later reported that redditors tried to hack into his Twitter and also made threats against him and his family; he announced in late January that Citron Research would no longer sell reports on short-selling.31 The following week, GameStop experienced another short squeeze, with the stock price surging to $76.71 on January 25.32

Stage 3: Responses by industry, activists, politicians, and journalists

As members of r/WallStreetBets engaged in this “two-pronged attack” defined by “pumping: boosting the share price…while also waging an information war.”33 The movement became more mainstream, garnering the attention of Elon Musk. On January 26, 2021, Musk tweeted “Gamestonk!!” with a link to the r/WallStreetBets page, and the stock price jumped by more than 100%.34 Both Citron Research and Melvin Capital also admitted to taking major losses as they reduced their position in GameStop.35 As media attention garnered by the movement amplified the movement, on January 28 during pre-market hours, GME’s stock price rose above $500 and r/WallStreetBets went from 2 million subscribers in early January 2021 to 5 million subscribers.36

Reactions from the press were somewhat polarized, with some of the mainstream media writing articles more favorable towards members of r/WallStreetBets and others portraying institutional players on Wall Street as the victims. Technology-oriented and digital-first media tended to be more sympathetic to the plight of the members of r/WallStreetBets. On January 27, The Verge ran the headline “How r/WallStreetBets gamed the stock of GameStop”37 and Business Insider reported on politicians’ criticism of Wall Street: “Elizabeth Warren and AOC slam Wall Streeters who criticize the GameStop rally, saying they treat the stock market like a ‘casino.’”38 The Guardian also depicted the retail investors vs. Wall Street as a David vs. Goliath trope on January 28: “GameStop: how Reddit amateurs took aim at Wall Street’s short-sellers.”39

Meanwhile, the traditional financial press characterized members of r/WallStreetBets more negatively. On January 26, MarketWatch, owned by the same parent company as The Wall Street Journal, warned “How you could lose everything by short-selling stocks, whether it’s betting against GameStop or Tesla.”40 On January 28, CNBC argued that Redditors were naive and would face bad consequences: “Leon Cooperman on GameStop Reddit speculators: ‘I’m not damning them’ but it will ‘end in tears.’”41 The Wall Street Journal alternately portrayed retail investors as naive and harming hedge funds: “Melvin Capital Lost 53% in January, Hurt by GameStop and Other Bets” (January 31, 2021);42 “Teens Are Gambling Their Savings on GameStop Stock. Their Parents Are Worried” (February 26, 2021).43

Stage 4:

Mitigation strategies against the GameStop short included content moderation and market responses by financial institutions who recognized they were the targets of the campaign. This included actions taken by major brokerages and regulators. A reduction in the stock price from a peak of almost $347.51 on January 27, 2021 to to $53.50 by February 4 suggests these mitigation strategies were significant.44 Furthermore, initial downward pressures on the Gamestop stock price due to these mitigation strategies were likely compounded by market forces, as fewer investors were willing to “hold steady” in the face of the falling stock price, cashing out before the crash or cutting their losses.

In this instance, content moderation played a relatively minor role in mitigation, given that the majority of activity was centered on the r/WallStreetBets subreddit, which was moderated by an independent team and subject to relatively light moderation.45 Its counterpart server on Discord was removed on January 27 due to violations of community guidelines, “including hate speech, glorifying violence and spreading misinformation” after “multiple warnings to the server admin.”46 However, in response the original server’s hundreds of thousands of members simply created replacement servers. Tellingly, the moderators of the r/WallStreetBets subreddit responded by condemning the discord ban,47 suggesting that only a minority of contributors were spreading hate, and that the ban was “pretty unethical.”

For reasons that are unclear, the subreddit itself was taken down for an hour, after which the message incorporating the moderator response to the Discord ban was posted. Another important part of this message was an acknowledgment that they would struggle to filter out all bad actors on the subreddit: “We have grown to the kind of size we only dreamed of in the time it takes to get a bad night’s sleep. We’ve got so many comments and submissions that we can’t possibly even read them all, let alone act on them as moderators.”48 A popular Facebook discussion group, “Robinhood Stock Traders,” a hub for day traders who used the popular Robinhood trading and investment app, was also taken down on January 28th, citing a violation of policies on “adult sexual exploitation.”49 The founder and moderator noted there was no trace of such activity on the group, but also acknowledged that it was an easier target than the subreddit, where moderation is typically lighter: “We were first on the picking tree to be cut off because we are on Facebook, not a free platform like Reddit.” Due to the lighter moderation and greater independence of Reddit as a social media platform, content moderation was overall not an impactful mitigation strategy in this case.

The response by institutions and market regulators is likely to have been far more impactful, though it is difficult to establish direct causation. On January 28, retail brokerages, most notably Robinhood,50 but also others including Interactive Brokers,51 Webull52 (though they quickly reversed their decision), Trading 212 and eToro53 blocked further purchases of GameStop and related stocks including AMC and Koss. This included raising margin requirements, how much money an investor using leverage and derivatives must have in their brokerage account following the stock purchase.54 The justification provided by Robinhood was that they had increased financial requirements, including SEC net capital obligations and deposits made to clearinghouses, due to the increased volatility in the market.55 These clearing houses, who are another intermediary for the transactions, in turn have their deposit requirements set by the “Depository Trust and Clearing Corporation,” who settle the transactions.56 Therefore, the move by the brokerages to restrict trading can be seen as a response to increased capital requirements, with restrictions on trading of many stocks for instance being relaxed by Robinhood after it received $1B in credit from existing investors.57

Regardless of the underlying reasons, restrictions on trading are correlated with a clear reduction in stock price. From January 27 to February 2, the stock price fell from $347.51 to $90.00 following restrictions imposed on January 28.58 There was considerable backlash to this on social media, with Twitter users expressing discontent. “Either #Robinhood allows people to trade freely in the market or they will lose millions of users #ToTheMoon #GME #AMC #NAKD” is an example of this discontent.59 Furthermore, Alexandria Ocasio-Cortez and Ted Cruz aligned across the aisle to condemn Robinhood’s actions as “unacceptable.”60

Other market players and regulators may have contributed to the falling stock price. Melvin Capital, one of the targeted hedge funds shorting GameStop closed out its position on Jan 27 after a “huge loss,” with investors Citadel and Point72 having to infuse close to $3 billion to shore up its finances.61 The fund never fully recovered and eventually shut down in May 2022.62 Andrew Left, co-founder of Citron Research, an online stock commentary site, a short-seller who had previously predicted the stock to settle back to $20 when it was at $40, released a video announcing he has covered his losses on the position, acknowledging “respect” for the “wallstreetbets” movement, and imploring them to stop personal attacks against prominent financial investors.63 Given part of the motivation behind the movement was to take down large financial institutions such as these, and that closure of their positions reduced scope of further upside, these market responses may also have contributed to reductions in stock price. Moreover, regulatory actions may have proved to be an effective mitigation strategy. A meeting held by Janet Yellen with regulators on February 4, to discuss if market intervention was required, was correlated with a further reduction in share price from $91.19 to $53.33.64 Furthermore, Jan 28 was also the date when the House Financial Services Committee announced it would convene at least two hearings to discuss online trading platforms,65 with these hearings held on February 1866 and March 17.67

Stage 5: Adjustments by manipulators to the new environment

Though the “GameStop frenzy” lasted a month in total, with the peak stock price rises and falls being within one week, the underlying engagement by retail investments on r/WallStreetBets remains. The subreddits subscriber base spiked from c.2m in January 2021 to c.8.5m by February, and it has steadily risen since, currently at c.13m subscribers.68 Gust Kepler, CEO of BlackBoxStocks, a trading software firm, note that “social media augments the ability for groups of investors to band together and share information in real-time,” with Reddit providing a much more centralized and visible forum for discussions on financial topics than old chat boards from the DotCom era.69 In addition, reductions in frictions to trading, including no-fee brokerages like Robinhood, increase market accessibility.70

Furthermore, despite the eventual, and perhaps inevitable fall of the stock price, GameStop can be viewed as a success story for the online independent investing community, whether through the lens of success stories such as u/DeepFuckingValue or scalps such as Melvin Capital. The recent release of the Netflix documentary “Eat the Rich: The GameStop Saga” further glamorizes the story and provides notoriety to its protagonists.71 Though “meme stock mania” and the r/WallStreetBets community was dismissed as a fad by some commentators, trading volumes linked to these stocks was sustained throughout 2021 beyond the initial period of hype.72 Furthermore, it continues to receive some level of attention in the press, for instance with recent interviews held with Jaime Rogozinski, the subreddit founder in Yahoo Finance (September 2022)73 and Forbes (November 2022).74 Terms popularized during the squeeze, including “#Gamestonk,” “#ShortSqueeze,” “#Diamondhands,” and “#Memestocks” continue to see use and some by investors, though they have largely been co-opted by spammers, small-scale and SEO manipulators.75 ,76

Figure 2: Example of terms popularized during the Gamestop frenzy.
Figure 2: Example of terms popularized during the Gamestop frenzy.
Figure 3: Example of terms popularized during the Gamestop frenzy.
Figure 3: Example of terms popularized during the Gamestop frenzy.

Discussion

GameStop provides an unprecedented case of how a coordinated online effort to manipulate a stock price resulted in significant impacts on the broader financial markets. This included heavy losses or closures for institutional investors, reputational damage to the trading platforms who were forced to step in and restrict trading, and considered interventions by major regulators, including the Treasury. It showed the potential for a small number of individuals, most notably u/DeepFuckingValue to provide the impetus for these impacts on the basis of market analysis validated by the results from their investment positions, which were then reinforced by others ‘bandwagoning’ on to their position. The sentiment underlying this of challenging the supremacy of institutional investors was also an important dynamic.

Reddit played an important role as a platform in this case. The upvote system increases the visibility of already popular posts, putting them at the top of the page and further reinforcing their popularity and visibility. Furthermore, the platform supports longer-form content, allowing for users to post more sophisticated investment theses supported by data. At the same time, shorter-form memes and ‘shitposts,’ both in thread responses and new posts built momentum to spread the initially more sophisticated messages further. Moreover, the platform’s system allowed for the community’s preservation when other communities on other platforms, including Discord, where there was potentially a lack of moderation of more harmful messages, and Facebook, where there was more stringent external moderation by the platform itself. By contrast, r/WallStreetBets moderators could curate the subreddit to remove harmful messages while protecting the broader movement around GameStop and related activity.

Though the case provides an example of market manipulation, whether it is a form of information manipulation or is up for debate. Though the dramatic fluctuations in the GameStop share price cannot be explained by the underlying fundamentals of the stock and resulted in financial losses for some ordinary individual investors, there was arguably a clear investment case for other individual investors. They perceived the stock was undervalued, even if not to the extent of overall price rises, and therefore in challenging the short positions of institutional investors, they were implementing a market correction. If those institutional investors doubled down on their position, this was not the fault of the r/WallStreetBets community, who were simply taking advantage of bad financial decisions. Furthermore, by providing a centralized platform for these individual investors to coordinate and share information, the subreddit’s community can be seen to be addressing a power imbalance in the markets.

GameStop can be viewed as a success for the online independent investing community, given the profits made and the scalps of large institutional investors. With 13M subscribers, r/WallStreetBets is here to stay. It remains to be seen whether there will be similar successes in coordinated market manipulations in the future, given greater preparedness from financial institutions and regulators.

The authors are students at The Harvard Kennedy School.

Cite this case study

Sandhya Jetty, Teresa Chen, Rehan Mirza, "Meme War: The GameStop Short Squeeze Campaign That Gamed the Financial Algorithm," The Media Manipulation Case Book, December 16, 2022, https://mediamanipulation.org/case-studies/meme-war-gamestop-short-squeeze-campaign-gamed-financial-algorithm.