The (revealing) short squeeze: Populism comes for Wall Street?

“We don’t have billionaires to bail us out when we mess up our portfolio risk and a position goes against us.”

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It’s been easy to ignore financial news for most of the last year. The upward trend of markets, especially in North America, and the more than $1 trillion enrichment of people already worth billions was too depressing to follow while so many struggled to pay rent, and, in the United States, lineups at food banks were miles long in some places.

Beginning in mid-January, something unusual turned the attention of many people back to the markets, which, buoyed by government bailouts and subsequent share buybacks, have been on an upward trajectory throughout the ongoing health crisis,. The euphoria generated in some quarters by Wall Street, Bay Street and the City of London’s stability provided an excuse for the wealthy people least impacted by the pandemic to ignore the suffering of those like essential workers and the recently unemployed.

Still, for a short moment at the beginning of this new year, it seemed like the kind of populism that’s roiled politics for the last half decade had found another expression in an unexpected attack on a segment of the 1% where it would hurt them most: their wallets. As the story was still unfolding, elements of both the populist right and progressive left celebrated the accompanying frenzy, if for different reasons.

This very contemporary story centers on an online Reddit community with a focus on day trading. The sub-reddit, r/WallStreetBets, or at least a big part of it, brought the price of what they refer to as ‘meme stocks’, especially retail game company Gamestop (GME), to dizzying heights in a matter of days. Offering some evidence of the age of many of the traders who shocked the Wall Street establishment at the end of last month, other stocks caught up in the buying frenzy were similarly nostalgic for a certain age demographic, including AMC Entertainment, Nokia, Bed Bath & Beyond and Blackberry.

The subreddit, which prides itself on being ‘apolitical’ and has 8.5 million users (who call themselves ‘degenerates’), takes an intentionally edgy, casino like approach to trading in what they refer to as ‘stonks’, defined by Dictionary.com as “…a deliberate misspelling of stocks… It is often used to refer to such stocks—and finance more generally—in a humorous or ironic way, especially to comment on financial losses.”

The forum’s most favored ‘stonk’, GME, went from a low under $3 at one point in 2020 to a high of $483 before the main platforms used by Wallstreetbets traders, Robin Hood, Interactive Brokers and Ameritrade among them, restricted users from buying the stock (and most of the others targeted) but still allowed them to sell it.

These actions on the part of companies like Robinhood that advertise themselves as leading the ‘democratization’ of investing, all but ensured that the price of Gamestop and other stocks targeted by the Redditors would go down in value. The trading apps also offered some relief for at least two smaller but well connected hedge funds that put themselves at great risk by ‘shorting’ GME, Melvin Capital and Citron Research, who eventually conceded defeat and closed out their ‘short’ positions on the targeted stocks, taking huge losses in the process.

As explained by Dean Baker, senior economist at the Center for Economic Policy and Research earlier this week, “A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.”

Interestingly, Robinhood’s largest customer, which profits from being the middleman for the app users’ ‘no fee’ trades, is Citadel Securities,a subsidiary of which also bailed out Melvin Capital when it was teetering on the brink of collapse. Somewhat ironically, Melvin may have been targeted because it’s more transparent than other funds about its shorts.

For progressives following the story, one of the main takeaways was that it exposed the lie at the heart of the so-called ‘democratization’ touted by Robin Hood and other day trading apps who came to the rescue of Melvin and Citron.

While it’s true that the day trading edge lords driving Wallstreetbets aren’t what the left might have liked them to be, they performed another public service in bringing to light the fact that big players like Citadel Securities can basically regulate markets themselves to protect their perceived interests and government agencies like the SEC in the U.S. that are supposed to be tasked with this will just go along with it.

As one Redditor put it, “We don’t have billionaires to bail us out when we mess up our portfolio risk and a position goes against us. We can’t go on TV and make attempts to manipulate millions to take our side of the trade. If we mess up as bad as they did, we’re wiped out.”

Besides, the short sellers could always be wrong or fail to see some hidden value in the companies they target. Is there a chance that Gamestop becomes the next Blockbuster? Sure, but judging by some of its recent hires, it could also be the next Netflix, which began as a company that rented DVDs by mail but pivoted to become a streaming pioneer.

The ongoing health crisis should also be seen as an important backdrop to the occasionally irrational behavior of many of those involved in the GME ‘short squeeze’. Many of those stuck at home have indulged everything from bread-making to conspiracy theories to relieve some of the boredom and angst of lockdowns, making an obsession with day trading and stocks as memes seem much less unusual. Although initial takes on the left about the frenzy around these stocks being an outgrowth of the Occupy movement were overblown, the targeting of big money short sellers can be seen as an expression of the simmering anger that has been growing since the 2008 Wall Street crash and the subsequent bailout of those responsible for it that also created that movement.

For many of the commentators on WallStreetBets, a central object of the squeeze seemed to be revenge, a sentiment someone called solidtwerks reportedly shared on the forum in question, writing, “I bought a house in 2008 at the ripe age of 21 just months before the crash. I was lucky to be making decent money so young but the truth is I could just barely afford it with a roommate. Then the bottom fell out. These (expletive) me. When I sold that home 5 years later I was still down 15%,”. “These (expletive) owe me. I’m taking what’s mine.”

In the end, some of those pushing the mania probably profited greatly (and put taunting ads on billboards to prove it) but many of those who jumped on a bit later are already sustaining losses as most of the targeted stocks fell in value as quickly as they rose, no doubt helped along by the restrictions placed on trades in these companies by the very services the day traders were using to buy their shares.

At first, the story seemed to unite progressives with the populist right on the side of the ‘little guys’. The difference is that Rashida Tlaib for example, in criticizing Robinhood’s actions stuck to her long held position of calling for equality for all under the law. While someone like Rand Paul may be able to lay some claim to the fact that many of those on Wallstreetbets probably see themselves as libertarians, a grifter like Ted Cruz retweeting AOC on the matter to pose as a populist is ridiculous when one considers his wife is a managing director at Goldman Sachs, which has long been one of the Texas senator’s biggest donors.

While what happened may turn out to be just the first chapter in an ongoing story of newly confident day traders taking on the titans of Wall Street for ‘lulz’, for many on the left, including this writer, it offers another compelling example of what we’ve known since at least 2008: the markets are fixed when needed to benefit the biggest players and like the casinos they have come to resemble, the house always wins.

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