GameStonk: The Forced Hand

Unless you have been living under a rock, you have probably heard mention of GameStop in the past few days. For any of those residing under the rock, I will explain the situation as simply and briefly as possible, but I wanted to talk about a few things that have been happening in the periphery of this battle over Wall Street.

For those unfamiliar with investing, the most common form of stock trading is to take a long position on a stock. This means I buy the stock from someone and I hold onto it, hoping that it will increase in value (we are not going to talk about dividends or shareholder voting rights today). There is a counter type of position called a short. This means you borrow a stock from someone, and you sell it right away. In the future, you must buy the stock back to then hand it back to the party you borrowed it from. This means that a “short” is one of the riskiest trades you can make because you have an unlimited downside. If I take a long position and I buy a stock for $10, the worst that can happen is that it can go to $0.  If I short a stock at $2-4 and the price rises to $320, I am contractually obligated to buy the stock at that price and return it to the person I borrowed it from, losing $316-318 on a $2-4 trade, and the stock price can keep going up. Now imagine if you shorted millions of shares. This is exactly what has happened with GameStop. Hedge funds took massive short positions against GameStop because they believed it would fail.

You might be thinking, well that is not so bad. If you think a company is going to fail and you make a risky bet like a short, that seems fair. I would agree with that, I don’t really have a problem with “shorting”, however, these hedge funds and market makers who participate in these massive short gambles are not the type of people to leave things up to chance. Financial media shows/publications allow these hedge funds and market makers to project opinions about the company they are shorting and the short becomes self-fulfilling. “I believe GameStop is going out of business”, then people start selling and your short becomes profitable. That is unfair. That is market manipulation.

Redditors on r/wallstreetbets, a subreddit dedicated to discussion about individuals investing, found out that a massive amount of short positions had been taken out on GameStop and they disagreed with the analysis that GameStop was going out of business. They began a loosely coordinated buying campaign that has grown exponentially over the past week. They drove the price of GameStop’s stock up to $320 (at market close on Friday) and these hedge funds are hurting. There is some technical finance stuff that I don’t totally understand, but it boils down to: you cannot just sit on a short position until it becomes profitable. Every day that the stock price is orders of magnitude greater than the price they shorted it at, these hedge funds encounter tremendous pressure and must sell off other assets to remain solvent.

On Thursday, we saw RobinHood and most brokerages that cater to small-time individual investors place restrictions on the group of stocks r/wallstreetbets has been targeting (GameStop is just one of 15 or so). They said that investors could no longer buy the stock, which by all means seems like blatant and unabashed market manipulation to help out the big players at the expense of the small players. This was a dramatic step and it showed a very strong case of potential collusion among different players in the financial industry. However, it was Wednesday night when players from other industries began to jump in (as it seems) on behalf of these wounded hedge funds:

  • r/wallstreetbets had a Discord server (a chat server) which was shut down on Wednesday evening. Discord released an official statement citing violations to their community guidelines such as “hate speech, glorifying violence, and spreading misinformation” and insisted “we did not ban this server due to financial fraud related to GameStop or other stocks”.
    • It seems like Discord has changed its tune since this decision and has employees working with r/wallstreetbets to improve moderation on a new Discord server. It is possible that they panicked due to the explosion of popularity for the server and were worried that the scrutiny would end up ruining Discord’s reputation. I can see that possibility, but the fact remains that they shut down the chat server at a high traffic time and no one publicly asked them to.
  • After the Discord server was shut down, r/wallstreetbets admins set the subreddit to private. This was the decision of the admins, but I find it hard to believe that they were not pressured to do so by Reddit site admins. So, at the point when this story was beginning to permeate circles outside of r/wallstreetbets, the subreddit goes private. This prohibits outsiders from accessing it and new users from joining during a high traffic moment.
  • On Thursday morning, RobinHood led the charge for brokerages and restricted small-time investors from buying GameStop. As a result, over 100,000 disgruntled RobinHood users went over to the Google Play Store and rated the app one star and soon its rating had dropped from ~4.2 to 1.0. Google then stepped in to save RobinHood’s rating by deleting over 100,000 reviews (Including mine, which I have resubmitted). Why would Google do this? The customers were truly displeased with the company that runs the app and I believe those ratings were genuine. Why did Robinhood need to be rescued by Google from a strong negative reaction from customers who felt betrayed?

And what is the government going to do? This is clearly an instance where a potential injustice has taken place and there need to be hearings, and if there was wrongdoing or flaws in our system, action needs to be taken. Many politicians have been opining on Twitter and elsewhere and pledging to hold hearings. I will not be holding my breath, though. Let me show you why.

Janet Yellen is Biden’s new Secretary of the Treasury. She is the former Chairperson of the Federal Reserve and yes, I work for the Federal Reserve. The opinions in this essay, as in all of my essays, are my own and are independent from the opinions of the Federal Reserve. Yellen is very sharp, and is unquestionably qualified for the job, but it has come to light that she accepted $800k in speaking fees at Citadel, a hedge fund at the center of this controversy. It is a clear conflict of interest and she should recuse herself from advising the president on the situation. It is clear, however, from a press conference with Jen Psaki , the new Press Secretary, that there are no plans for her to do so. This is part of a pattern of apathy in government for conflicts of interest in matters to do with financial institutions.

Washington DC and Wall Street have been married for decades. Alexandra Ocasio Cortez stated on Twitter that she wants to hold hearings for RobinHood, and Ted Cruz replied, “I agree”. AOC rebuffed him in an absolutely atrocious way (and I have really lost my patience with her), but it is possible that Ted Cruz should be rebuffed since his wife has worked for Goldman Sachs since 2005. The majority of those in Congress are millionaires and that money is likely not only coming from their congressional salaries. There is money coming from other sources and one of those sources is Wall Street. Because of this, I expect a lot of hearings, a lot of talking and hand wringing, and very little action. You don’t bite the hand that feeds you and Wall Street feeds Washington DC.

Discord and Reddit suppress the communications of the rebellious individual investors, Google steps in to save the reputation of RobinHood, and our government expresses outrage, but avoids taking action. All of these actors are acting in concert as a cabal and their actions do not benefit common Americans. These institutions realize that people are waking up, but they seem unaware of the key fact: they exist to serve us, and they exist because we allow them to exist. A handful of reddit bros made a few powerful hedge funds cry uncle and the Wall Street/telecomm/media/government cabal quickly stamped the boot down hard. They are betting that we will lose resolve after taking a hit and that we will fall back in line, but they underestimate how focused and stubborn a people can be when they are angry.

I want to end with this. What is happening with GameStop is not good. A lot of regular people have money that is being managed by hedge funds and when these hedge funds fall, these people will get hurt. Also, upon discovering that crowdsourced market manipulation is possible, perhaps more meme stocks will be pushed, and the market will become more volatile and people will get hurt. I am scared about where this road can lead, but what other options have we been left with? After 2008, the banks got bailed out on the dime of the American people and almost none of the people whose irresponsible gambling that created the economic collapse went to jail. Some of them got bonuses. The regulation that followed proved to do more to protect “too big to fail” banks and crushed smaller banks. Are these banks more responsible with their bets than they were before? It would seem they are not. So, if the banks are going to play with our economy like it’s a toy and our politicians are going to let them, what recourse do we have?

Those who make peaceful revolution impossible, make violent revolution inevitable.

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