Gamestonk!!
Laissez-faire vs Crony Capitalism
New Year started with a bang. The four “I”s of the four Wednesdays of Jan 2021 (Insurrection, Impeachment, Inauguration, and finally Investments) kept the news cycles busy. But, the shit hit the roof when the Democratic Senator, Alexandra Ocasio Cortez, and the Republican Senator, Ted Cruz seemed to agree with one another.
The GameStop debacle: What really happened?
Stocks like Gamestop (GME), Nokia (NOK), AMC Entertainment Holdings Inc. (AMC), Bed Bath and Beyond (BBBY), which had been losing money for years and were known for their unsustainable business models especially during the pandemic, suddenly seemed to skyrocket in value on January 27th, 2021. A small group of investors ganged up in favor of these market laggard “meme stocks” through a Reddit community called WallStreetBets that resulted in a phenomenal spike in price.
The stock of Gamestop, a video game retailer rose to $373 a share from a price of $20. Approximately 500,000 users joined the Reddit thread within three days to encourage the buy. Apparently, a co-founder of Chewy, the online seller of pet supplies, had joined the board and was purported to help in the company’s transformation by focusing on digital sales. Similarly, AMC was supposed to be a good bet because it managed to raise a capital of $917 million to alleviate its debts.
However, the real reason the stock prices of these meme stocks shot up were the numerous small investors decided to bet against the “short sell” calls placed by hedge funds and financial institutions. Fueled by their resentment against the Establishment (the 1% elite) and supported by tweets from personalities like Elon Musk and Chamath Palihapitiya, these Reddit investors took on the “Goliaths of the financial world” by storm and caused them billions of dollars in damage.
While not a new phenomenon in politics, this was the first time the small-time investor displayed such blatant aggression towards the financial sector that had hitherto seemed untouchable despite the economic meltdown of 2008.
Why was the Reddit army so mad?
Despite being a Capitalist country, equal access to financial markets is blocked by the manipulations of hedge funds and large investors. Even if you have the financial literacy and the savings to invest, wealth creation for the common man is still a dream because of reliance on financial institutions to initiate trade.
Laissez-faire capitalism is never at play, and as markets are manipulated by vested interests, the common man is refused a piece of the pie. Though taxpayer money was used to bail out the big banks in 2008 despite their questionable practices, successive governments have systematically removed all regulatory requirements and gave them free rein to conduct business as usual.
While individual investors are denied the opportunity to make money and buy the stock at a low initial offering price, big financial institutions make a killing because approximately 80% or more of a company’s Initial Public Offering (IPO) goes to institutional investors. Due to artificially inflated demand, the IPO stock price hits all-time highs which enables the professional investors to sell at huge gains. Founders and employees who toiled with their sweat and blood to establish the startups are left holding the can because the regulations prohibit them from selling for extended periods of time. While all this plays out, the large inside investors make their profit and disappear.
Short sell is also a strategy commonly used by professional investors to “borrow a share and sell it in hopes of buying it back later at a lower price and pocketing the difference.” Melvin Capital and Citron Research, the two investment firms that bet against Game stock and faced the ire of the Reddit investors used this strategy and subsequently, ended up with a significant loss.
Often, companies use a practice called “fomenting”, where a hedge fund manager creates and promotes fake news about a company to drive its stock up or down and invests accordingly to make a profit. While illegal, the Security and Exchange Commission (SEC), the government’s regulatory organization, is helpless to track it successfully.
Market manipulation is not a fantasy, and it happens due to “a collusion of the major players.” But this time when it happened, millennials and Genz investors caught on to it. As a financial guru, Jim Cramer pointed out,
“These guys (large financial institutions) use massive amounts of cash to make this stuff work and are not afraid to mislead many people with propaganda and false news to get them to move one way or another. It is all for-profit and unless you can see through this veil of lies, it will be very hard to make returns with people like this moving massive amounts of cash through the system. It is a legal, quick way to make money and very satisfying.“
How can we counter the monopoly of the institutional investor?
Much of stock trading may now be automated using technology and algorithms. So, does it follow that we can escape our reliance on financial advisors and the domination of financial institutions, or are they a necessary evil? Many alternative options are available including, Blockchain, SPACs, and free apps like Robinhood that make stock trading easier for small-time investors.
Blockchain may be used as an alternative to the centralized authority of banks. For more information on Blockchain, see my article.
Special Purpose Acquisition Companies (SPAC) are an alternative method for offering IPOs of companies. SPACs are increasingly popular as they have taken several well-known companies IPO, like DraftKings, Virgin galactic, and Nikola Motor. Their operational model involves a collaboration between professional executives and reputable fund managers who solicit investment from people and are on the look-out to buy good companies based on a good technology or a business model. Cash that is raised gathers interest until a deal comes along and investors have the option to vote or rescind their support. Not only does this provide access to the common man, but it also eases the time taken and streamlines the process for the company to go to market without any IPO price manipulation by big financial firms.
Free apps like Robinhood are also immensely popular with younger investors, 78% of whom are under age 35. Inspired by the Occupy Wall Street movement, the two co-founders, Baiju Bhatt and Vladimir Tenev sought to provide access to stock trading. However, the name is somewhat ironic since it also puts their money at risk. In fact, Robinhood Gold allows users to trade on margin i.e. borrow money to buy stocks and trade during extended hours.
The idea of using technology to change the financial system is a thing of genius and opportunity. But, though it may be empowering for millennials and Gen z to invest in companies they care about, it also pushes them to take risks with money they don’t have. Robinhood encourages this by gamifying its platform. Thus, while Robinhood claims to improve lives, it also feeds on the vulnerabilities of the youth, and business ethics can be manipulated. This became obvious when Robinhood suddenly suspended trading on January 28 to prevent the small Reddit investors from making big profits at the cost of financial firms and hedge funds, some of whom may have had ties with the platform.
Reddit also clamped down hard and closed the r/wallstreetbets thread that had caused so much market volatility, possibly due to pressure exerted by their investors. The gamer-friendly platform Discord also shut down a text and audio chat group called r/WallStreetbets. Google salvaged bad Robinhood ratings by deleting over 100,000 negative reviews. See article. This sends a chilling message for both democracy and capitalism. It seems that whoever owns the communication channels sets the standards and operating protocols for the financial market and society.
Financial Terrorism or the Revolt of the Common Man
Many financial institutions complained about the “Ponzi scheme” initiated by the Reddit investors because it sank the mutual funds where many retirees and trade unions invest their money. However, others resented the high-handed action taken by Robinhood and filed lawsuits, and “Stop the Steal” became a common refrain.
Irrespective of where one stands on this issue, everyone can probably agree on this. Not allowing small investors to sell their stocks by claiming it to be an IT glitch, yet allowing internal institutional investors to trade is a SCAM and someone must be held accountable for it. We may agree or disagree with the Reddit revolutionaries, but restricting free speech and manipulating communication channels does not bode well for the future.
Be it litigation or regulation, steps are obviously needed to clean up the mess. A distinction must be made between laissez-faire and crony capitalism. Otherwise, it is Gamestonk indeed!!
