Reddit vs Wall Street: Who Controls the World’s Capital?
Reddit’s manipulation of the stock market forces us to examine our economic system.
Ever since the introduction of financial technology (FinTech), the need for traditional banking has been slowly disappearing, revolutionizing the banking industry to include handheld devices. In an article by Finance Monthly, researchers claim that FinTech provides “open access to data, hassle-free banking experiences, and fairer deals for customers.” Technology has created a market in which users of all demographics have access to financial platforms that can teach them to manage their money and involve themselves in a world that was previously almost exclusive to bankers. In addition to the creation of new financial markets, technology and social media has created a rapid-fire way for people to access and spread information, leading to unprecedented economic situations, like what happened at Robinhood in January.
After a group of Redditors shared Wall Street’s plan to “short” the company’s stocks on r/WallStreetBets, users took to the commission-free trading app Robinhood to buy stock in GameStop and drive the prices up. According to Knowledge@Wharton, shorting is, “a special kind of financial trade that is a bet that a stock will go down, or a hedge against a stock that will go up.” By increasing the price of stocks and intercepting Wall Street’s trade, Redditors made large hedge funds lose billions of dollars. Users’ ability to rally together and cause widespread change to the financial market was both unfamiliar and unnerving to the trained professionals and working people who trade stocks. The developments of this story have forced everyone to think about who controls the market and how tech will change the tides of the economy.
Power of the People
The introduction of FinTech has created a threat to incumbent banking due to its “disruptive innovation” and supply of solutions to typically overlooked areas of industry. According to Knowledge@Wharton, “fintech’s recognized comparative advantages [are] filling in the gap that traditional financial institutions could not.” As a result of the added accessibility, people have been able to participate in the financial activities that were previously reserved for the top one percent of earners. In the case of what happened with Reddit, people used this new access to “get back” at hedge fund owners. One Reddit user says that, “There is a real redistribution of billions of dollars going to people who otherwise wouldn’t get to, especially inside of an economic and financial system which is irrational, full of bubbles, but only a few people have the resources or the information or the time to take advantage of. Whereas, everyone else is told that they’re not allowed to.” Although this stick-it-to-the-man mentality is the driving force behind the actions of many users, the financial implications of their actions hurt the very people they believe they are fighting for.
Power of the System
The Robinhood situation shines a spotlight on the negative effects of social media and the accessible market created by FinTech. The fast spread of information allows for a large-scale “madness of the crowds” by momentarily driving stock prices up despite the companies having no predicted longevity. People manipulate the market and go for the popular stocks, which pivots the interests of potential investors — including those who are skilled in finance— to risky stocks with unlikely momentum.
In an interview responding to the GameStop situation with Yahoo Finance Live, Bill Smead said, “The short sellers have gotten incredibly crushed in all of these even before they ganged up on the stocks. Now they are ganging up on them. Who is left to buy when the buyer at the margin is something that’s just trying to torture a short seller? This is incredibly unhealthy. There will be hell to pay for what you are seeing on your screen right now.” Compounding the issues created by buying mania, about 7% of Americans lost some of their pension money that was invested in big hedge funds. Pension plans help workers accumulate funds that they will use after retirement. The actions of Redditors amounted to about $4.5 trillion in losses for retirees. Reddit’s effort to take control of the market was made with good intention but had many negative outcomes.
Despite the issues created by this incident, it is not hard to understand why Redditors are so passionate about reclaiming control over the market. According to a study by the University of California at Santa Cruz called Who Rules America, “In the United States, wealth is highly concentrated in relatively few hands. As of 2013, the top 1% of households (the upper class) owned 36.7% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 52.2%, which means that just 20% of the people owned a remarkable 89%, leaving only 11% of the wealth for the bottom 80% (wage and salary workers).” Historically, a small group of people have controlled a majority of the world’s capital and the economic system has been managed in a way that maintains that disparity. In addition to holding the bulk of the world’s capital, these top earners are also notorious for working against the financial interests of the general population. This was seen in the 2008 economic recession when many bankers shorted stock in real estate markets and made millions of dollars despite knowing the negative effects the recession would have on the working class. Consequently, there is a measure of distrust between the working class and wealthy people. There is also a mantra that no matter what happens in the economy, “the rich will keep getting richer” and according to Forbes, “In spite of all the talk about trade wars, conflicts in the Middle East, tariffs and fears of a recession, we’ve witnessed an increase of 1.1 million millionaires from mid-2018 to the middle of 2019.” All of this to say that if the breach of trust and wavering relationship between the working and upper class is not mended soon, there will be similar, traumatic economic situations in the future.
The beginnings of this financial revolution provide a big indication that we should re-examine our financial systems. What happened at GameStop showed that change is necessary and in demand, but how do we make that change? Who should have the power in our economy? Should it be reserved for one group? How has technology changed the market?
Sources:
https://kwhs.wharton.upenn.edu/term/short-selling/
https://knowledge.wharton.upenn.edu/article/can-fintech-make-the-world-more-inclusive/
https://www.newyorker.com/news/our-columnists/the-gamestop-saga-is-dangerous-and-all-too-familiar
https://www.wsj.com/articles/gamestop-stock-short-squeeze-ugly-side-11611750250
https://finance.yahoo.com/news/game-stop-stock-mania-will-end-very-badly-expert-175258794.html
