GameStop investors may have transformed day trading forever

• Day traders organized on a Reddit thread led the GameStop mania, an unprecedented situation in financial markets.
• Day trading really took off with the 1990s tech boom, and continues to evolve along with trading technology.
• The combination of day trading with Reddit may prove transformative, with the GameStop saga the turning point.

The GameStop frenzy continues.

The video-game retailer was on the brink of death in 2019, and has clung on for nearly two years, as Insider's Ben Gilbert reported. As recently as August, its stock was trading at just $5 per share.

By January 27, GameStop had hit new highs of over $325 per share - an 8,000%-plus increase from just a few months ago. As of January 29's close, the stock was at $295 per share.

It seems that retail investors are largely at the helm of it all. The term refers to individual investors who buy stocks as personal investments. Many of these are likely day traders, a type of retail trader that buys and sells shares and options within a single day, typically to capitalize on short-term price movements.

Interest in GameStop started picking up in the second half of 2020, when deep-pocketed investors including Michael Burry and Ryan Cohen began buying up shares, bringing it up gradually to $35 per share. Around the same time, some hedge funds started "shorting" the stock, essentially betting that its shares would plummet.

But there's a Reddit thread and a Robinhood app, which combined in the GameStop affair to transform day trading forever.

The WallStreetBets forum, which grew in size over the past several weeks from about 2 million to over 4 million, features a lot of participants who are either fans of GameStop, angry about short-selling hedge funds, looking for a profitable day trade, or some combination of those.

The organized might of this Reddit thread - with trades largely executed via day-trading-friendly platform Robinhood - sent GameStop soaring, and caused an estimated $19 billion of losses for short sellers in the company as of January 29.

Technology has shaped day trading as we know it

To understand how we got here, you have to know a little of the history of day trading, how it's been shaped by technology, and why this moment could represent such a break with the past.

While intraday trading dates back decades, with precedents as far back as 1920s-era "bucket shops" - storefronts where retail investors could impulsively buy and sell stocks within a single day - the practice really took its modern shape during the dotcom boom in the 1990s.

E-Trade was the posterchild of the new era in day trading, as it made investing easier by providing traders with access to price quotes, trading activities, and the ability to participate in IPOs. It became both perpetrator and victim of the dotcom bubble, as day trading plunged alongside the tech crash.

But day trading has boomed again during the pandemic in a surge reminiscent of the turn of the millennium. Those bored at home and looking to make money have turned to apps such as Robinhood, which saw explosive growth in 2020.

Technology ultimately brought efficiency and accessibility to day trading, and, as it evolved, continued to shape the practice. But day traders haven't quite banded together to blow up a single stock's value like they have with GameStop. Reddit CEO Steve Huffman said on Thursday that while the WallStreetBets forum isn't perfect, the users are "well in the bounds" of the website's content policy.

While it's unclear just how many of the investors piling in to GameStop are actually day traders, the movement has pumped up extraordinary trading volumes, prompting service disruption across several brokerages, including Robinhood. On Thursday, TD Ameritrade restricted certain trades and Robinhood blocked purchases of GameStop and other volatile stocks. The latter move was slammed by everyone from Rep. Alexandria Ocasio-Cortez to Sen. Ted Cruz. Even rapper Ja Rule took to Twitter, decrying Robinhood's block on new trades as a "crime."

GameStop may have changed the game forever

The government is keeping an eye on the situation.

White House Press Secretary Jen Psaki said the Treasury and others were "monitoring the situation" with GameStop, Insider's Katie Canales reported on Wednesday.

And in a statement that didn't directly mention GameStop, the US Securities and Exchange Commission (SEC) said on Wednesday that it was "aware of and actively monitoring the ongoing market volatility in the options and equities markets." By Friday, the SEC said it was reviewing actions by entities such as Robinhood that had inhibited trading ability and said it "will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity."

Congress will hold hearings in both the house and senate over the same trading restrictions.

Deutsche Bank's Jim Reid called it one of the most "crazy" things in his 25 years working in finance. "It's shaken up the system and there will be some permanent changes to the ways investors, especially hedge funds and retail, act."

No less a figure than Ray Dalio, the billionaire who is increasingly a Cassandra of capitalism, likened the situation to a "financial rebellion" in a recent interview with The Washington Post. What's different about GameStop, he said, is how the mechanics of the market are being used to squeeze short sellers, and this kind of rebellion, "if it's not destructive, if it's not antagonistic, is part of an evolutionary process."

A JPMorgan note on Friday asserted that the GameStop mania exemplifies three markers of financial instability: decentralized finance, a surge in retail trader influence, and potential asset bubbles. "What is unfolding is certainly an alternative model for trading and investing whose influence is unlikely to disappear soon," it stated.

As Jaime Rogozinski, founder of the now-famous Reddit forum WallStreetBets, recently told the Guardian, "I didn't think it would go this far."