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GameStop: How day trader Reddit bros burned a Wall Street pro

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One bear has even stopped commenting on GameStop stock, citing harassment from some members. Wall Street Bets has done this before.

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They're particularly big fans of electric-vehicle stocks; Tesla enjoys unique enthusiasm on the forum. Yet previous Reddit-fueled rallies typically lasted a matter of days before profit-taking pulled prices back to earth.

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The subreddit's obsession with GameStop shows no signs of abating. Simply put, the subreddit amplified a trade, stoked a fear of missing out that pulled in new investors, and reveled in Wall Street's surprise. Reddit promotes itself as "the front page of the internet.

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Posts and comments are public, and those that receive the most positive votes, or "upvotes," from other users are featured most prominently. During the GameStop-trade saga, several Wall Street Bets posts with tens of thousands of upvotes have graced the pseudo-hall-of-fame page.

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Countless users unfamiliar with Wall Street Bets have been exposed to its exuberance and high-risk, high-reward behavior, often through posts showing off multimillion-dollar gains on GameStop shares. The core behavior seen in the market isn't unheard of.

Market Extra

Richard Smith, the CEO of the Foundation for the Study of Cycles, told Insider that GameStop's rally was "absolutely" a momentum trade, just one operating in a "very compressed time frame. The first few days of gains saw Wall Street Bets members cheer the rally and beg more to join in. It's all fuel for the acceleration of these sentiment cycles. There's also financial gain to be had for those pursuing internet notoriety.

'The institutions are losing some control'

Reddit users can award posts and comments with various virtual medals, many of which can be gifted only through the use of real-world currency. Sneering memes can pull in a few dollars' worth of awards. Others rake in small fortunes. Reddit's structure and the democratic nature of users picking the most popular content differs wildly from Wall Street's research reports and market analysis. Yet both generate trade ideas that proliferate across market participants. So it was that the tables turned on Wall Street — and a hedge fund star suddenly found himself at the mercy of the day-trading Reddit bros who have become one of the most powerful, if improbable, forces in the stock market today.

By Wednesday, the firm had capitulated to the amateurs and covered the GameStop short.

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The explosive growth in retail day-trading, powered by platforms like the Robinhood trading app and forums like wallstreetbets, has turned the old order on its head. Melvin Capital is focused on generating high-quality, risk-adjusted returns for our investors, and we are appreciative of their support.

Exposing Positions

But losses on bearish bets can be more severe and swift. And while using options may limit losses, investors can get wiped out quickly if the stock rises. Investors caught in a short squeeze can close out bets and eat their losses, or try to ride out the price surge — typically requiring they put up more money. Cohen, one might argue, was bailing out his own investment. For Griffin, it was a rare opportunity to invest in a talented manager on the cheap.

Both firms got a minority revenue share from the firm for stepping in. Until this year, Plotkin, 42, had one of the best track records among hedge fund stock pickers. Why they singled out Melvin remains a mystery.

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As far as hedge fund managers go, Plotkin is considered low key. The most obvious explanation is that his positions were in some sense knowable.

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Hedge funds generally go to great lengths to guard their short positions. On Monday morning, Plotkin reached a deal with Point72 and Citadel to provide him with more liquidity to help put Melvin back on the offensive. Griffin, who started Citadel in , has a history of swooping in when others are in distress.