The boom in Gamestop's stock price shows that ordinary people can exercise their collective power, writes Jesse Ward.
IF THERE'S ONE thing that the 2008 Global Financial Crisis (GFC) put on the map, it was the concept of short-selling. During this time, the crashing economy was a breeding ground for Wall Street hedge fund managers who profiteered off the bets they placed against the financial stock of declining companies.
Short-selling has been placed on the map once again, but this time it's exposed an interesting double-standard that exists in the free market on how investors "should behave" in the eyes of Wall Street titans.
To provide context, for those unbeknown to the workings of the free market, this beloved tradition of hedge fund managers is when investors make money off stock prices falling. In a short sell, an investor borrows a security and sells it on the market with the intention to buy it back later for less money when it falls, as expected.
As you can imagine, a downturn is the perfect time to whet the appetites of these hungry hedge funders who profiteer from the decline in a company’s value. This practice got so out of hand in 2008 that it led to U.S. regulators (as well as Australian) to temporarily ban the short-selling of stocks out of fear it would exacerbate the market downturn by perpetuating a downward spiral in stock prices during the crisis.
Political commentators in the U.S. cheered on the ban in 2008, claiming that the U.S. Securities and Exchange Commission (SEC) had:
'... let speculators and hedge funds turn our markets into a casino.'
They went so far to say that the chairman of the SEC had 'betrayed the public trust' and should be fired.
Fast forward to 2021 and we find ourselves in another dramatic market downturn as a result of COVID-19. Short-selling has never been more popular as companies across several industries take a deep dive.
Closely analysing the behaviour of hedge fund managers such as Melvin Capital and Citron Research, known for their expertise in short-selling, a group of smaller-pocketed investors on Reddit known as "r/Wallstreetbets" have managed to coalesce together to drive up the stock prices of GameStop, a retail-based company that has been popular amongst short-sellers in recent times.
This coalition of investors has managed to drive up the stock price of GameStop from $6, where it sat four months ago, to $470 on 28 January. For the hedge funders waging on a decline, this has resulted in disaster loses, namely Melvin Capital and Citron Research. Melvin Capital has had to lean on its Wall street friends such as Citadel and Point72 to the attune of $3 billion to shore up its finances, as they ran at an undisclosed loss.
This event has sent shock waves through the economic and political realm. Recently appearing on CNBC, the President of NASDAQ called on financial regulators to step up and combat groups like the Wallstreetbets, claiming that “manipulation is manipulation” and that new technology mediums should be monitored for this kind of behaviour.
This view was echoed across Fox Business and CNBC with news anchors like Scott Wapner having a near-breakdown over the idea that a group of online investors could rally against wealthy investors and beat them at their own game.
Billionaire Leon Cooperman branded this event as an "attack on the wealthy" while The New York Times described the online group as being led by 'greed', a term which is often saved for the hedge funders that govern our free market every other day.
Shortly following this, Robinhood, the platform that hosted many of the trades that purchased GameStop stock, announced trading restrictions on GameStop and other equities that resulted in several class-action lawsuits being launched.
Mainstream media in the U.S. has also begun drawing parallels between the group of investors and those that stormed the U.S. Capitol.
The only thing that has been stormed here is the Wall Street status quo. While it is questionable, it is not illegal for hedge fund managers to share insights and coalesce together on trades to manipulate outcomes within the market. The threat posed in this situation is that a group of online investors can get together and do the same thing, shedding billions of revenue from the elites that rule Wall Street.
In what’s been seen as a wake-up call to Wall Street, the tables turning has revealed just how open to manipulation our free market is in the first place. Rarely do we see the financial sector calling for more regulation, but it seems in the event their ability to make profits are directly impacted, calls are supposedly warranted.
Robinhood has since reversed the trading restrictions they placed on GameStop and other equities after receiving scrutiny online that they were protecting the wealthy. Robinhood markets itself as being born out of the Occupy Wall Street movement and brings democracy to finance by facilitating commission-free trades.
Despite their efforts, it is widely known that Robinhood helps protect the Wall Street status quo by selling its customers data to Wall Street’s largest firms including Citadel, who then use those insights to understand how prices on the market are going to trend.
This full-circle motion gives these wealthy firms a huge advantage in the market, so it’s no wonder when they decided to restrict trading there was an uproar online.
What becomes clear from this saga is that the free market is subject to manipulation every day. Usually, that manipulation is at the hands of market titans like Citadel and Melvin Capital, however, on this rare occasion the power was seized by a group of regular people.
As this situation continues to develop, the financial and political class continue to call for curbs on "memetic disturbances”. This poses a dangerous threat to our freedoms online and contributes directly to the era of increased censorship we find ourselves navigating.
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