gamestop

How Redditors Used GameStop to Take Down a Billion Dollar Hedge Fund

Fluctuating wildly Monday and Tuesday, the stock opened at an eye-popping $302 a share Wednesday morning after trading at less than $18 a few weeks ago.

Forget David vs. Goliath. Right now it's Reddit versus hedge fund managers. And for the moment at least, Reddit is on top.

An army of smaller-pocketed, optimistic investors, largely fueled by Reddit, is throwing massive dollars and buy orders at the stock of GameStop — in direct opposition to a group of wealthy investors who were counting on the stock price to plunge.

GameStop was targeted by an army of retail investors who leveraged forces against short sellers in online chat rooms. In the Reddit forum “wallstreetbets,” with more than 2 million subscribers, rookie investors encouraged each other to pile into GameStop’s equity and call options, creating massive short squeezes in the stock.

The resulting action has seen GameStop's stock soar. After fluctuating wildly Monday and Tuesday the stock opened at an eye-popping $302 a share Wednesday morning after trading at less than $18 a few weeks ago.

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The action has forced some of the high profile short sellers of GameStop, including Melvin Capital and Citron, to scramble. Melvin Capital closed out its short position in GameStop on Tuesday afternoon after taking a huge loss, the hedge fund’s manager told CNBC’s Andrew Ross Sorkin.

GameStop got a boost in extended trading on Tuesday after Tesla CEO Elon Musk tweeted out the link to the Reddit board where much of the discussion has taken place.

GameStop has struggled over the last 12 quarters, losing $1.6 billion, and its stock fell for six straight years before rebounding in 2020. So, it might seem like a strange place for the focus of so much movement. But GameStop has been a target of many professional investors, who say the company will continue to flounder as sales of games continue to go online.

Shorting a Stock

These investors have been betting that GameStop's stock will fall. They “shorted” the stock, which means they borrowed shares and sold them, hoping to buy them back at a cheaper price and pocket the difference. But such bets have been disastrous recently.

GameStop started climbing a few weeks ago after the company named three new directors to its board on Jan. 11 to help speed its turnaround, including a co-founder of online pet-supply retailer Chewy. Some investors were optimistic these new board members would help GameStop's digital transformation.

A cavalcade of smaller investors, meanwhile, has been exhorting each other on the internet to keep the stock's momentum flying toward the moon. Many are pitching it as a battle of regular people versus hedge funds and big Wall Street firms.

In recent years smaller investors have used apps like Robinhood which one of the first to allow investors to purchase fractional shares of expensive stocks. It's allowed those smaller investors to have greater sway in the market.

But despite the frenzy surrounding GameStop, Robinhood’s CEO is stressing that the majority of the stock trading app’s clients are long-term investors.

“Most of our customers are, you know, what’s called buy and hold,” CEO of Robinhood Vlad Tenev told Andrew Ross Sorkin on CNBC’s “Squawk Box” on Wednesday. “Obviously the passive ones don’t get as much attention out in the public.”

It took just five days for GameStop's stock to double after announcing its board shakeup. This past Friday, it surged 51%, a larger gain than big stocks like Apple or Exxon Mobil have ever had in a day. For GameStop, the 51% move was only its second-best day of the month — and the month isn't over.

The meteoric rise pushed some short sellers to get out of their bets, done by buying shares of the stock, and that helped accelerate its momentum even further. On Monday, the push and pull was so extreme that trading in GameStop's stock was temporarily halted at least nine times for volatility.

“This is quite the experience for my first month in the stock market. Holding till infinity,” posted one user on a Reddit discussion about GameStop stock. A moment later, another user said, “We’re literally more powerful than the big firms right now.”

The Associated Press and CNBC contributed to this report.