How day-traders are using Reddit to upend the stock market and make money in the process
- Retail investors on the WallStreetBets online forum continue to boost GameStop shares, defying hedge funds and conventional investing norms in the process.
- Members of the group have formed a snowballing momentum trade as posts go viral and pull in new, curious Reddit users.
- The unconventional stock rally - which largely ignores fundamental analysis - is a sign that "the institutions are losing some control," Dr. Richard Smith, CEO at the Foundation for the Study of Cycles, told Insider.
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The subreddit's subscriber count ballooned by 133% to 1.8 million members over the course of last year. Growth accelerated further this month, and the forum's 2.2 million current members now drive one of the platform's most active pages.
Members have spent the past three weeks bidding up GameStop, and the results have been spectacular. Shares have skyrocketed more than 1,200% since WallStreetBets first piled in on January 11. Their overwhelming bullishness has fueled billions of dollars in losses for short-sellers. Alleged harassment from some members even led one bear to stop commenting on GameStop stock entirely.
WallStreetBets has done this before. Options-obsessed members have boasted about trading everything from newly bankrupt car-rental giants to now-delisted Chinese cafe chains. They're particularly big fans of electric-vehicle stocks; Tesla enjoys unique enthusiasm on the forum.
Yet previous Reddit-fueled rallies typically lasted a matter of days before profit-taking pulled prices back to earth. The subreddit's obsession with GameStop shows no signs of abating. Simply put, the subreddit amplified a trade, stoked a fear-of-missing-out that pulled in new investors, and reveled in Wall Street's surprise.
Here's how the snowballing trade was born.
Monetizing the meme
Reddit promotes itself as "the front page of the internet." Part social media, part news aggregator, part discussion forum, the platform hosts a diverse set of communities ranging from r/WorldNews to r/BabyElephantGifs. Posts and comments are public, and those that receive the most positive votes, or "upvotes," from other users are featured most prominetly.
On WallStreetBets, members frequently brag about outsize gains - and, in some cases, losses - and make a mockery out of risky trading behavior. Some posts garner so many upvotes they are elevated to r/Popular, the constantly updated subreddit that flaunts the day's most interacted-with posts.
During the GameStop-trade saga, several WallStreetBets posts with tens of thousands of upvotes have graced the pseudo-hall-of-fame page. Countless users unfamiliar with WallStreetBets have been exposed to its exuberance and high-risk, high-reward behavior, often through posts showing off multimillion-dollar gains on GameStop shares.
The core behavior seen in the market isn't unheard of. GameStop's rally is "absolutely" a momentum trade, just at one operating at a "very compressed timeframe," Dr. Richard Smith, CEO at the Foundation for the Study of Cycles, told Insider. A momentum trade is generally characterized by investors continuing to pile into a proven winner.
The first few days of gains saw WallStreetBets members cheer the rally and beg more to join in. Posts made it to r/Popular, WallStreetBets members gained online infamy, more casual investors were introduced to the trend, and a cycle began.
"This is a human emotional cycle," he added. "And now you have more people at home and spending more time on their devices. It's all fuel for the acceleration of these sentiment cycles."
There's also financial gain to be had for those pursuing internet notoriety. Reddit users can award posts and comments with various virtual medals, many of which can only be gifted through the use of real-world currency.
Sneering memes can pull in a few dollars worth of awards. Others rake in small fortunes. The week's most popular WallStreetBets post - bragging about an alleged 992% return on GameStop options - received a cool $765 worth of awards, according to an online calculator program.
'The institutions are losing some control'
Reddit's structure and the democratic nature of users picking the most popular content differs wildly from Wall Street's research reports and market analysis. Yet both generate trade ideas that proliferate across market participants. And WallStreetBets' ability to turn free, user-produced research into hugely viral media has seemingly been underestimated.
"You have these media-driven platforms where the media isn't controlled by the institutions in the way that it has historically been," Smith said. "It's really a sign that the institutions are losing some control."
Many WallStreetBets members advertise the GameStop trade as a surefire way to post quick gains, so long as they keep the bullish faith.
They've largely been right. After experiencing an initial pop roughly two weeks ago, gains have continued in pronounced fashion and amounted to more than 300% this week alone, through Tuesday's close.
Others rally investors to the cause by posing the GameStop trade as an anti-establishment movement, a middle-finger to an industry that underestimates Redditors' influence. They proclaim that, with fee-free trading platforms, easily accessible margin, and enough allies, they can beat the funds that have dominated Wall Street for so long.
They, too, have something to show for themselves. Hedge fund Melvin Capital will receive a $2.75 billion investment from Citadel and Point72 Asset Management after losing roughly 30% on its GameStop short, according to The Wall Street Journal.
"When you are able to feel like you're a rebel going against the establishment, that's a very powerful emotion, Smith said. "It's absolutely part of what is contributing to this gain stock event."
He continued: "You read the language on the message board, it's very 'us-against-them.' That's so powerful."
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