Why is Wall Street obsessed with GameStop, the video game chain that until recently was known for middling performance? The company’s stock has soared to scarcely believable levels — its market capitalization is now more than $20 billion — thanks to an army of small traders spurred on by a Reddit message board, the DealBook newsletter explains.
Traders on the Reddit message board, WallStreetBets, a community known for irreverent market discussions, made GameStock their cause du jour and rushed to buy out-of-the-money GameStop options, a bet on the company’s share price rising in the future. (A sample comment on the board: “PUT YOUR LIFTOFF DIAPERS ON ITS ABOUT TO START.”) Both Tesla’s Elon Musk and the billionaire tech investor Chamath Palihapitiya also egged on the crowd via Twitter.
The frenzy has forced market makers who sold the options to buy the underlying shares to hedge their risk. As more traders snap up options, the brokers have to buy up more shares. That squeeze is driving the astounding rise in the company’s stock price, which began the year at $19 and opened for trading on Wednesday at around $350, double the previous day’s close.
Gabe Plotkin, the hedge fund trader whose Melvin Capital was shorting GameStop — and who recently raised a $2.75 billion bailout from Citadel and his former boss, Steve Cohen, amid the short squeeze — confirmed to CNBC on Wednesday that he had exited his position. Though Mr. Plotkin’s other short bets appear to be suffering, possibly because they are being targeted by traders (Melvin and Mr. Plotkin are often pilloried on the message boards), he said that his firm had plenty of capital.
Officials at the Securities and Exchange Commission and elsewhere are closely watching internet chat rooms for signs of potential market manipulation, though they can do only so much without clear signs of fraud. If a big group of traders simply decides to buy options on a stock at the same time, out in the open, for the heck of it, proving malfeasance may be difficult.