Three years after its stock market surge, GameStop and its cast of characters have a pulse. Yes, Roaring Kitty, Robinhood and WallStreetBets are back in the news.
While the latest round of interest is less about impact and more about who’s posting on social media again, the attention offers a moment to revisit the saga and explore why it has set the tone for the future of social media relations.
Just to recap, GameStop rose to fame in early 2021 when a misfit crew of non-professional traders – also known as retail investors – used social media to rally around the nearly defunct company and push its share price to US$483. The movement was largely viewed as a rebellion against Wall Street hedge funds, which had shorted the brick-and-mortar video game chain by 140%. By late January 2021, billions of dollars were flowing through online trading platforms, and some of the most popular brokerages – notably Robinhood – were forced to freeze sales of the stock to avoid breaching emergency lending requirements. The result: a dramatic, overnight crash in price – but not before eight billion in short seller losses and reputational damage for two major hedge funds: Melvin Capital and Citadel LLC.
Three years on, and public skepticism surrounding the story continues: Did Robinhood and Citadel LLC collude to freeze stock sales? Was social media influencer, Roaring Kitty, exploiting his power to “pump and dump” the stock? Why did the moderators of WallStreetBets, really suspend trade talk on subreddit?
But there is a larger, fundamental question still at play: Why did the GameStop frenzy occur in the first place?
Many retail investors would say that the GameStop rebellion was a battle of class – that feelings of inequality and unfairness propelled retail investors to overthrow hedge fund shorting. And that was certainly part of the equation, but it wasn’t the whole picture. Take, Senvest, for instance. The hedge fund actually joined retail investors to buy stock and took away US$700 million in profit – a far cry from “eating the rich” as Netflix describes.
So, what was really at the heart of the GameStop drama? Many things, but it would be hard to argue that a lack of respect for social media influence wasn’t important.
Prior to 2021, the primary risk to short sellers was unexpected financial growth. And with GameStop, growth did not look realistic. Whatever Roaring Kitty said about the business acumen of CEO Ryan Cohen, there wasn’t a strategy, business model or modernization plan that justified a share price of US$483 in 2021. To quote the Financial Times: “shares had become detached from reality.”
But that didn’t stop retail investors – including nurses, teachers, and students – from pouring their life savings into the belief that GameStop would prevail. The truth was they had an edge: they understood social media mobilization.
While investment decisions have always depended on more than operational forecasts, GameStop took things to the next level. Social media commentary became not only an influence but the driver for investment.
For the short sellers, it was an unaccounted risk. Without knowing or caring about what was happening on Reddit, Twitter or YouTube, the fund managers were left exposed to investor mobilization.
But even when news of the saga hit the press, fund managers looked ill-prepared. Melvin Capital, for instance, repeatedly “declined to comment” when approached by media outlets. Citadel CEO, Ken Griffin – for his part – did participate in broadcast interviews, but his appearances looked like overly assertive lectures about the differences between “investing” and “conspiracy theories”. It also would have helped if fund managers hadn’t colloquially referred to retail investors as “dumb money”.
In the end, the lack of attentiveness to public sentiment became costly. Both Citadel and Melvin took major financial hits. Melvin, in particular, struggled to regain its footing and was forced to close in June 2022. The fund managers, meanwhile, came under severe public and congressional scrutiny and wound up as the villains of both a Hollywood film and a Netflix documentary – not exactly a fairy tale ending.
So, what are the take-away messages from the GameStop frenzy?
- Respecting the risk of public backlash on social media is a must for institutional survival in the 21st
Since GameStop, the financial world seems to be learning. According to a 2022 Bloomberg Intelligence survey, 85% of hedge funds and 42% of asset managers now claim they are monitoring social media channels as part of intelligence gathering. JPMorgan Chase & Co. has even launched a new platform to track retail investor flow along with stock talk on the internet.
- When corporate criticism moves from social media to mainstream news, it must be met with messaging that speaks to concerns.
While it is not clear if the hedge funds have reflected on their “deer in the headlights” reaction to GameStop media pressure, there seems to be more respect for retail investors now. In 2022, JPMorgan’s, Chris Berthe, explained to the Wall Street Journal: “It’s a whole new investor class that has emerged, and it’s an investor class that’s actually getting themes right.” Moez Kassam of Anson Funds, meanwhile, gave praise in an interview with Forbes: “Retail investors have become a genuine force to be reckoned with.”
It may be difficult for the maritime and industrial world to draw comparisons with the experiences of Wall Street hedge funds, but the general principles for media and social media management remain the same. Navigating any crisis requires a strategy for managing the risk of public reaction. That strategy must be attentive and sensitive to social media sentiment. The effort to implement the strategy must be dedicated and thorough.
As financial intel expert, Ihor Dusaniwsky, stated in the Wall Street Journal: “It’s a full-time job to make sure you don’t get hit by a bus.”
