Who says you need to possess an opulent office near the New York Stock Exchange, appear regularly on the business news channels, and use complex industry jargon to make it on Wall Street? In this environment, all you need is a little bit of capital, a free mobile trading application, and a meme to become the next kingpin in the financial markets. It might be time to say hello to this generation’s Gordon Gekko: The YOLO and FOMO millennials with nothing to lose, except a pitiful $600 stimulus check from affluent bureaucrats in Washington. The newest David and Goliath battle has the money managers weeping on CNBC while the meme-makers are having the thrill of a lifetime. But will Wall Street Bets, a Reddit forum turned decentralized hedge fund, dismantle everything we have known about finance, or will the money managers wield the state’s power to crush the opposition?
Bam, Zoom, Right to the Moon
In only a few trading sessions, the denizens of r/WallStreetBets sent shares of heavily shorted stocks to the moon, capturing international headlines for defeating the money titans. AMC, BlackBerry, GameStop, and several other tickers posted eye-popping daily double- or triple-digit gains, thanks to the stampede of two million WSB users. And, according to several popular posts on the sub-page, these guys and gals are just getting started.
But how did the stock market get to this point? It was all about the short squeeze.
A short squeeze takes place when a stock surges and requires traders, who speculated the asset would fall, to buy shares to prevent greater losses. The frenzy triggers upward pressure on the stock’s price. This is what happened to GameStop, the retail video game store.
Melvin Capital, a $12.5 billion hedge fund, and Citron Capital, a venture capital firm, placed shorts on the stock. The positions made sense. GameStop is facing the same coronavirus-induced headwinds as other storefronts, and consumers have been vocal about their disdain for the company’s policies, particularly its trade-in value. So, why wouldn’t any investor short this stock?
Ostensibly, according to Bloomberg, the WSB putsch started in October when a user submitted a post, titled “GME Squeeze and the demise of Melvin Capital.” Reddit users monitored the fund’s movements, identifying what stocks were being purchased en masse and what were being betted against – it was a paper trail of someone desperate to be caught. Typically, if hedge funds are using put options (sell shares of a security at a set price at a specified date), they buy them over the counter, which does not require regulatory filings. Months later, the short squeeze campaign was a success, and mom-and-pop traders earned a pile of money. Melvin Capital booked a reported $3.75 billion loss, requiring a bailout from its competitors.
Not everyone is happy about the euphoria and what unfolded, with talking heads and affluent investors demanding regulations. It seems the big boys and girls are permitted to distort markets. But is heightened regulation possible, and would it only benefit the pillars of 11 Wall Street?
Can’t Beat ‘Em? Regulate Them
Massachusetts Secretary of the Commonwealth William Galvin told CNBC that the immense movement in GameStop trading poses a risk to the broader U.S. stock market:
“The marketplace should be a place where risk is taken, but not reckless risk and not a situation that undermines the system, and that’s what we’re looking at here.
It creates uncertainty in the marketplace. You know, the dot-com bubble of 1999 — I was regulator then also — came about because of a lot of uncertainty in the market.”
His solution? A 30-day suspension of GameStop stock trading.
Others think the Securities and Exchange Commission (SEC) could investigate the matter and determine if some pump and dump manipulation occurred on WSB.
But while the government has yet to intervene, several trading platforms have begun reining in the success. TD Ameritrade, for example, installed several restrictions for GameStop and AMC transactions. Charles Schwab also added limits to trading activities involving GameStop. Other outlets, including Robinhood, experienced convenient malfunctions throughout the January 27 trading session.
That said, when GameStop shares come crashing down to Earth and the mainstream business media report on the plethora of armchair investors who lost their life savings, the regulators will come knocking. The White House is already monitoring the situation, and Sen. Elizabeth Warren (D-MA) urged federal regulators “to wake up and do their jobs.”
Wall Street Bets may have finally bridged the gap between the divisive left and right in the United States on at least one issue. The populist wings of the conservative and progressive movement celebrated the armchair traders and poked fun at the elite.
Rep. Alexandria Ocasio-Cortez (D-NY) mocked those complaining “about a message board of posters also treating the market as a casino,” while Saagar Enjeti, a right-wing populist at The Hill, said that Wall Street “can’t stand that someone other than them is making money…it reveals how much of a sham this all is.”
CNN, of course, could not help but blame the GameStop fiasco on former President Donald Trump. CNN editor-at-large Chris Cillizza asserted that the sentiment of Trumpism was behind the 1,000% spike. The cable news network cannot ditch its Trump habit and blame the man for everything under the sun.
The War on WSB Has Begun
Will the power brokers shut down Wall Street Bets? Discord banned a server associated with the Reddit forum for allowing “hateful and discriminatory content after repeated warnings.” Soon after, the r/WallStreetBets temporarily went private, requiring new potential members to receive an invitation by the moderators. If those who have successfully memeified the stock market, even for a couple of trading sessions, get censored by the elite, it might be proof that the equities arena is rigged. But when you have a central bank pumping trillions of dollars into the stock market, bailing out Corporate America, and privatizing gains and socializing losses, was it not already a Potemkin Village?
Read more from Andrew Moran.