The Retail Investor Revolution
By Caroline Downey
Unless you live under a rock, you’ve likely heard a lot about GameStop over the last week. Many of us have a love-hate relationship with the store. In many ways to Gen Z’ers GameStop is our Blockbuster— it’s a nostalgic memory of a bygone era where you used to get ripped off for your used games and overcharged for new ones. In light of online game downloads, Game Stop has faced a precarious couple of years. Today, GameStop is still a company, and it still has stores, but it’s representative of an investment war between Wall Street elites and the day traders. In what has become a global movement and story, day traders on Reddit are taking a stand against Wall Street and Big Tech, and we’re here for it.
On Wall Street, a collection of elite finance firms make their megabucks via calculated but risky investment strategies based on quantitative science. One hedge fund, Melvin Capital Management, predicted that GameStop, our beloved childhood video game store, would face the same sad fate as Blockbuster and tank. Seizing the opportunity for mammoth profits, Melvin shorted GameStop stock and waited patiently for its collapse. But deep in an internet Reddit forum, a proletariat revolution was brewing among rookie day traders and nostalgic gamers looking to throw a wrench in the institution’s plans and save Ol’ Reliable GameStop from ruin. These self-taught investors piled into GameStop (GME) and other cult underdog stocks, sending their share prices to astronomical levels. While the little guys finally got their big break and secured great returns, the hedge funds incurred terrific losses.
So in typical bourgeois fashion, the hedge funds sounded the panic alarm on the amateur “finance bros” who disrupted their schemes. To stop the bloodletting, these firms allegedly colluded with several online brokers, notably Robinhood (ironic name), and banned the masses from trading GME and several other Reddit-backed stocks. Amidst the rampant cronyism, an unusual alliance formed between the populist right, populist Left, conservatives, and socialists alike to condemn the conspiring and Gamestop moratorium. To bring the outrage into perspective, Texas Senator Ted Cruz retweeted AOC— that’s nuts.
While one Reddit page certainly caused a lot of market volatility and once again undermined the idea of value trading, the hedge funds’ intentional market manipulation in the aftermath raises serious questions about the freeness of our “free” market. We the people are just as entitled to invest and trade ourselves into prosperity as the yacht-owning, Hamptons-vacationing wealth hoarders in NYC. A bunch of rag-tag average Joe investors made a stand on Wednesday, January 27th. They didn’t go to Wharton, work in Manhattan’s financial district, or wear expensive suits. Yet, they shifted the balance of power from Wall Street to Main Street overnight.
The GameStop debacle has been illuminating for both sides of the political spectrum. Much like the buyer’s remorse now felt by many Biden voters, many people had the delayed realization that Donald Trump was right when he alleged that the system was rigged against the common man. Robinhood, an online trading platform with no fees, has emerged as an unlikely villain in the fiasco. Despite Robinhood’s branding, which claims it is “democratizing trading,” the broker waged war on the very “customers” it claims to represent. Rather than follow its own folklore inspiration and redistribute money from the rich to the poor, Robinhood the brokerage, forfeited the potential earnings of the less endowed to Wall Street. Robinhood instantly cut off traders from buying shares and only allowed selling, robbing them of the chance to cash in on the meteoric stock rally. Which begs the question: why would Robinhood willingly commit suicide?
Robinhood’s whole mission statement caters to the beginner investor without investing expertise. It represents the investor who doesn’t have a seat, the person who doesn’t have an entire quant team and complex algorithms executing hundreds of trades a minute. In fact, the vast majority of Robinhood accounts only have between $1000 and $5000 in them. The total volume and value of shares traded on Robinhood on a daily basis is a fraction of a percent of the total volume traded on US markets alone. Frankly, Robinhood and its traders are not big players, which is what makes this situation so nauseating. Robinhood abandoned its core user base to accommodate the needs of hedge funds. Why would they do this? Because Robinhood’s real customers are hedge funds, not the people day trading in their basement. Operating under the guise of a retail trading platform, Robinhood gets revenue by selling data directly to hedge funds.
Let’s remember: Melvin Capital went billions in the hole thanks to the Reddit guys. Fortunately, another hedge fund called Citadel came to the rescue and bailed Melvin out. Who is one of Robinhood’s biggest clients? Citadel, of course. Weirdly enough, the co-founder and Chief Investment Officer of Melvin Capital, Gabriel Plotkin, joined Citadel out of college. Mr. Plotkin was also involved in an insider-trading investigation in 2014 that forced him out of his previous hedge fund, SAC Capital, and led him to found Melvin- ironically named after Mr. Plotkin’s late small-business owning grandfather. In the financial system, corruption runs deeper than we ever imagined.
To paraphrase Congresswoman Alexandria Ocasio-Cortez, Wall Street has long treated the stock market as its personal casino. The oligarchs and their cronies make their fortunes by manipulating the news to prop up companies and running smear campaigns to drown them. They’ve artificially supported their own institutional portfolios for years by pressuring the printer at the Federal Reserve to pump perpetual monetary injections and stimulus into the economy. While Americans struggled to put food on the table this year, Wall Street hit record highs, and hedge funds recorded some of their best years on record. Market manipulation is the business model of hedge funds. But the hedge funds didn’t like it when Redditors and a Wall Street Bets message board learned their tricks and stole their thunder. The Reddit boys beat them at their own game, so the billionaires called a time out, changed the rules, and orchestrated a crash on these stocks to relieve the pain of the hedge funds.
The likely outcome of this is a couple of fines, maybe an SEC investigation, but Wall Street, as it always does, will walk away unscathed. A couple million in fines means nothing to a man like Gabriel Plotkin, who pocketed $300 million alone in 2017. While hedge fund partners can cut million-dollar checks, regular people invested their rent money into these stocks, but the cartel guaranteed they never saw the returns. Why? They don’t want regular people to succeed or play in their leagues. Billionaires are allowed to take risks and make money, but not you. The big banks can blow the economy in the name of profit, get bailed out by the taxpayer, and never see any repercussions, but the average stock-trading Redditor gets blocked when they beat the big boys on a dumb trade. Institutional investors can steer companies into bankruptcy or recovery with one media hit, but you can’t make memes about Gamestop on a message board or invest your life’s savings in a stock you believe in. Given these odds and double standards, is it really any surprise that the rich keep getting richer while we stay at the bottom?
Now that average Americans have exposed the delinquency of Wall Street, the hedge funds have slandered the Reddit gamers as “dumb money” and labeled the incident “Gamergate.” While the day traders participating in the open market did not engage in illegal activity, the hedge funds and Robinhood did do something nefarious. There needs to be an investigation, and people need to be held accountab\le. The free market, as the name implies, needs to be free. If there is to be any restoration of transparency and accountability to our financial infrastructure, Wall Street’s injuries must be investigated by the Securities and Exchange Commission and penalized where due.
Photo via @classicrepublicans
