Reddit Users Vs. Wall Street Giant In Fight Over GameStop Stock Value
ARI SHAPIRO, HOST:
I've seen a ton of tweets today asking, can someone explain what's happening with GameStop? Well, we're about to try. OK. GameStop is a video game retailer, and its stock price was about $20 a share earlier this month. Then it rose to $240. This is because a group of amateur investors decided to take on some Wall Street giants at their own game. If anyone can sort this out for us, it is NPR's economics podcast, Planet Money, where Mary Childs is one of the hosts.
Mary, you up for this challenge?
MARY CHILDS, BYLINE: I'm going to try, Ari.
SHAPIRO: OK, what's happening with the GameStop stock?
CHILDS: So this starts in a place on the Internet known as Wall Street Bets. It's this forum on Reddit where day trader types - nonprofessionals - trade tips as well as memes and flexes and a lot of emojis.
CHILDS: And a while back, one of these Reddit traders started making the case that GameStop was a good stock to bet on, had all this cash. But then part of the argument became this kind of unusual thing, that it was a good stock to bet on because these big, established hedge funds were betting against it. It became this kind of call to arms to take on Wall Street, and it snowballed from there.
SHAPIRO: And the way they were going to try to take on Wall Street was related to short selling, which I've heard of, and something I've not heard of before called a short squeeze. What is that?
CHILDS: Yes, so it's a lot to unpack. Let's go step by step. So first, the shorting - big hedge funds were betting that the stock for GameStop would go down in price. That's the short part. They were short the stock. To do that, they borrow the shares of the stock and sell it. And if the price goes down, they can buy it back at that lower price, return the borrowed stock and pocket that price difference. But if the price goes up, if they're wrong, they have to buy back the stock at that higher price, and that leaves them vulnerable if there's, say, a run driving up the price really fast, like if a ton of small investors all suddenly decide to buy the stock at the same time.
SHAPIRO: So that's what happened here. That's the squeeze. And this was all orchestrated on Reddit? I mean, how did these small investors have the means to affect the entire market?
CHILDS: It's kind of wild. So basically, Wall Street Bets has learned to weaponize this type of trading. The tools that they use are called options. And options trading has become super popular in the past year, especially thanks to retail trading apps like Robinhood. Options allow people to use relatively tiny amounts of money to have these huge, outsized impacts. So using that short squeeze thing, but they're also playing with this other dynamic, which kind of hyper-simplified is if you go out and buy an option, you're buying it from someone. And whoever sells you that option now has to go out and buy the stock themselves to protect themselves. And that has the effect of driving up the price even more. So Wall Street Bets pros have basically learned to combine these dynamics to get the most bang for their buck.
SHAPIRO: And so what does this all mean for, like, the balance of power in Wall Street? Is this like David and Goliath?
CHILDS: Yes. And thematically and sort of aesthetically, this might feel familiar. It's this angry, nihilistic revolt against the institutions, the establishments of our country. It's a joke that kind of becomes not a joke. And it's also got these Occupy Wall Street themes, but it's armed with sophisticated financial tools. So it's the same feeling, though. It's this feeling that the system is rigged against the little guy, and this is them taking it back.
SHAPIRO: Mary Childs, host of NPR's Planet Money podcast, I'm so impressed. And I think I actually understand this now.
CHILDS: Thanks for having me. Transcript provided by NPR, Copyright NPR.