Innovation Crusader 🚀 | Author 📕 | Speaker 🎙 | Adjunct Professor 🎓 | YouTube Content Creator 📹

A MemeStock Is Born

Jan 29, 2021 | News & Analysis

It was a fight of the common investor against hedge-fund cronies. A collision of the real and virtual world, blurred beyond recognition. In one corner were “Jokerfied, pandemic-bored Redditors” moving market for lulz (laughs), seizing an opportunity to make millions off GameStop, a company that sells physical copies of video games next to Auntie Anne’s pretzel shops in dying malls.

And so the first stock meme was born. You know what a meme is, usually a photo that has some pithy text attached, like the example provided above. GameStop was, of course, the chief beneficiary of this internecine war between the Redditors, represented by the 4 million members of the r/wallstreetbets chat group, and the daily active users of the “free” investing app Robinhood, a figured that soared between Jan. 1 and 27 by more than 1 million, rising to 2.6 million, a record.

In 2020, GameStop’s stock price jumped from $4 last summer to $20 by the end of 2020, to $40 two weeks ago. It was worth $100-ish at times on Monday, Jan. 25, and Tuesday, Jan. 26, was worth close to $300, making the company suddenly worth more than $10 billion.

Meanwhile, online forum site Reddit broke its download record for its mobile app, with 199,000 single-day downloads on iOS and Android, Apptopia estimates, while also climbing to No. 2 on the Overall Top Charts on the U.S. App Store.

The GameStop frenzy also floated the boats of more traditional trading apps, like Webull, TD Ameritrade, E*TRADE, and Fidelity, which all benefited from the virtual bull stampede. With record-breaking daily user counts and. Webull rose to a No. 45 overall chart position, followed by TD Ameritrade at No. 53, E*TRADE at No. 113, and Fidelity at No. 178.

Webull also recorded its highest number of daily active users on Wed., Jan. 27, with 952,000, while TD Ameritrade saw a record 444,000 daily active users and Fidelity had a record of 429,000, according to app tracker Apptopia.

Caught in the mêlée, Robinhood, the original enabler of the memestock crowd was now suddenly in a Catch 21 situation. On Thursday, the company, founded by Robinhood CEO Vlad Tenev, put up a brave front in an email to customers that assured that its original mission statement was still very much intact:

> The past year, in particular, has shown us that the financial markets are for everyone—not just institutional investors and hedge funds. We’ve seen a new generation enter the market, and they’re sparking conversations about what it means to be an investor. **We stand in support of you, our customers. Democratizing finance for all means giving more people access, not less.**

That very day, Robinhood had to recant from its “democratizing finance for all” position, stating that “in light of recent volatility” it is “restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD, and $NOK.” The company added that it has “raised margin requirements for certain securities.”

That “raised margin” pointed to the urgent need to raise cash from its investors to the tune of $1 billion. The online brokerage was grappling with an extraordinarily high volume of trading as individual investors piled into stocks like GameStop, AMC, BlackBerry, and Nokia, all marginal cause célèbre(s) for the disenfranchised. That activity put a strain on Robinhood, which had to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses.

Naturally, this emergency raise followed more bad news in December, when Robinhood agreed to pay a $65 million fine to settle charges of misleading customers. The Securities and Exchange Commission noted that Robinhood had misled its customers about how it was paid by Wall Street firms for passing along customer trades and that the start-up had made money at the expense of its customers. Robinhood of yore was famous for stealing from the rich to help the poor, not the other way around.

Other victims included hedge funds who found themselves trapped in short positions. Melvin Capital and Citron Research, and another well-known shorter, the $20-billion fund D1 Capital Partners had to pump the brakes. D1 turned out to be the biggest loser so far, with a reported net loss of 20%.

But the memestock rally benefitted the downtrodden in unexpected ways. The AMC theater chain was able to wipe out $600 million in debt due to its lottery-like windfall of the GameStop-fueled bull run. Discord, another virtual community much in vogue these days is now helping the r/WallStreetBets team moderate a new server. Discord originally banned the group Reddit forum due to “hateful and discriminatory content,” sending repeated warnings to the team managing the community. A week ago, it was not crazy to think this company was doomed,” Bloomberg’s Matt Levine wrote on Thursday. “Now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week.”

Those warnings, for whatever reason, were ignored, but now r/WallStreetBets and Discord are working together. How apt that a community called “Discord” would come to the aid of another discordant community.

Michael Tchong’s Ubertrends book
Share This