The Enriching of the Wealthy: How Reddit’s Trading Frenzy Boosted Wall Street’s Elite

Rather than heralding a new era of investor populism, the tumultuous journey of GameStop’s stock might simply underscore what seasoned investors have always known: Wall Street excels at turning a profit.

The recent frenzy surrounding GameStop’s trading, ignited by members of a prominent Reddit investing community, aimed to challenge the dominance of Wall Street elites who often dismissed them as uninformed investors. However, emerging evidence suggests that the outcome may have favored larger players.

Major mutual funds holding substantial stakes in GameStop witnessed significant increases in their value. Hedge funds, some of which have employed algorithms to monitor retail investors’ activities on social media platforms, were observed buying and selling millions of shares during the stock’s most volatile periods, according to industry analysts.

Moreover, some novice investors found themselves at a loss.

Instead of signaling a resurgence of investor power, GameStop’s stock saga may reinforce the notion that Wall Street’s prowess in wealth accumulation tends to prevail, often leaving smaller investors in the lurch.

According to regulatory filings, the four largest asset managers globally collectively own 39 percent of GameStop shares, primarily held in passive index funds for extended periods. These stakes have collectively appreciated by approximately $1 billion since the year’s onset. Senvest Management, a hedge fund, reportedly boasted to clients about earning over $700 million from a GameStop bet placed in September, as reported by the Wall Street Journal.

Steve Bruce, a spokesperson for Senvest, declined to comment on the GameStop trades.

The substantial volume of shares traded during the stock’s frenetic phase in late January suggests that the episode was driven by more than just individual retail investors. Some hedge funds bought shares to cover their short positions, incurring financial losses. Others likely engaged in calculated short-term trading maneuvers as the stock’s price surged, opined Robert J. Shapiro, a policy fellow at Georgetown University and former economic advisor to President Bill Clinton.

“The Reddit community cannot feasibly compete in this high-stakes game,” Shapiro remarked.

Determining who benefited from the stock surge is pivotal for regulators investigating potential market manipulation for profit. While individual investors can freely express their views on social media, it is illegal for a group to coordinate efforts to artificially inflate a stock’s price, explained Jacob S. Frenkel, a former senior counsel at the Securities and Exchange Commission (SEC).

Licensed professional investors, regulated by the Financial Industry Regulatory Authority, face stricter constraints regarding their discussions on stock positions, Frenkel added. Legal experts anticipate regulatory scrutiny of social media posts to ascertain whether sophisticated investors exploited online anonymity to stimulate demand for stocks.

The Veiled Influence of Institutional Investors

The proliferation of retail investors, facilitated by commission-free online trading platforms like Robinhood, has compelled Wall Street firms to acknowledge the significance of individual investors they previously disregarded. Hedge funds have begun deploying algorithms or enlisting external firms specializing in monitoring Reddit and Twitter conversations to gauge retail traders’ sentiment. Several such services, including Swaggy Stocks, Robintrack, and Quiver Quantitative, have emerged in recent years.

“The most innovative investment firms recognize the importance of monitoring Reddit for portfolio management,” noted Justin Zhen, co-founder of Thinknum Alternative Data, a New York-based software firm.

Besides Senvest, many Wall Street firms have remained tight-lipped about any gains from GameStop. However, industry insiders suggest that the soaring stock price likely received a boost from larger investors’ discreet involvement.

Benn Eifert, chief investment officer of QVR Advisors in San Francisco, posited that major hedge funds were likely privy to the GameStop buzz early on, courtesy of their active monitoring of social media platforms.

“You can bet that large, sophisticated firms are equipped with technology for real-time insights,” Eifert affirmed.

Last year, prominent hedge funds were discovered to be extracting trading data from the Robintrack app, which compiled information on Robinhood users’ stock transactions. Casey Primozic, the app’s creator, revealed substantial traffic traced back to servers associated with these firms.

“It confirmed the value of such data to major players,” Primozic acknowledged.

Representatives for Point72, Two Sigma, and Capital Fund Management declined to comment on the incident or their involvement in GameStop trading. D.E. Shaw did not respond to inquiries.

Despite GameStop offering 47 million shares for trading, the sheer volume of transactions during its turbulent ascent implies more than retail investors’ passive participation. Shapiro highlighted the recurring pattern of shares being bought and sold multiple times daily, indicative of hedge funds capitalizing on volatility for profit.

“If prices fluctuate rapidly, it presents ample opportunities for hedge funds to profit,” Shapiro explained.

The revelation of social media monitoring as a potent tool for Wall Street has altered the landscape. Christopher Kardatzke, co-founder of Quiver Quantitative, observed heightened interest from hedge funds and institutional investors in their data analytics services, indicative of a paradigm shift in market influence.

“The influence of retail investors on markets is undeniable,” Kardatzke remarked.

Professionals and the Dynamics of Online Forums

Regulators are also exploring whether employees of major financial institutions actively leveraged Reddit forums to enhance their portfolios. Despite posters’ anonymity, r/WallStreetBets has attracted individuals well-versed in trading intricacies, sharing screenshots of trading terminals and discussing substantial investments in stocks, noted forum founder Jaime Rogozinski.

“Since its inception, the forum has drawn professionals,” Rogozinski affirmed.

The forum’s sophistication became evident in late 2019 when users exploited a Robinhood app glitch, enabling them to execute trades with borrowed funds. This savvy maneuver showcased users’ adeptness in financial matters, according to Rogozinski.

Joey Brookhart, a hedge fund analyst in Denver, observed that many forum posts aim to artificially inflate stock prices, a tactic known as “pumping.” While some posts may originate from active traders, Brookhart suggested that not all are necessarily professionals.

“The network’s potential for manipulation is apparent,” Brookhart observed.

Undoubtedly, Redditors played a crucial role in initiating the surge that propelled GameStop shares to unprecedented heights. Notably, a user known as DeepF—ingValue, revealed to be Keith Gill, garnered attention for advocating GameStop since purchasing $50,000 worth of stock.

While Gill has maintained that his intent was not to artificially inflate stock prices, regulatory scrutiny has intensified. Debra O’Malley, a spokeswoman for the Massachusetts secretary of the commonwealth, confirmed ongoing examinations into Gill’s social media activities in connection with his employment at MassMutual.

“It appears they were unaware of his [social media posts] and likely would not have approved them,” O’Malley disclosed.

Paula Tremblay, a spokesperson for MassMutual, confirmed Gill’s departure from the company and indicated ongoing reviews of the matter.

Andrew Hong, a Toronto-based financial software analyst who invested in GameStop options, remarked that both Reddit investors and Wall Street professionals share a common goal: profit.

“While there are savvy individuals on [WallStreetBets], it essentially boils down to amateur gamblers versus professional ones,” Hong concluded. “There are no heroes in this narrative.”