I know very little about the stock market–just enough to recognize that the term “playing the market” is more revealing than those who use it may recognize. The 2008-9 financial crisis revealed that–rather than sober decisions to invest in solid companies in hopes of long-term growth– a large number of “masters of the universe” were simply gambling.
In other words, the stock market has become a casino– yet another symptom of a society that has abandoned the basics in favor of game-playing. And not so incidentally, the rules of those games favor the obscenely rich.
The recent GameStock pushback by small investors couldn’t have been more aptly named.
Unless you’ve been hiding under a rock the past few weeks (not that I’d blame anyone for hiding at a time when all aspects of American society seem to be coming apart), you’ve undoubtedly heard the basic outlines: GameStop is a retail chain that began by selling video games; it has struggled to stay open, thanks to the COVID-19 pandemic and the attendant increase in streaming. Its problems were widely recognized and it was a disfavored–even reviled– stock on Wall Street.
So the “pros” (aka gamblers) thought they could make money by “shorting” the stock as its price went down.
When investors decide to short a stock, they are essentially betting against it. They “borrow” shares of the stock on the assumption its price will decline; they plan to buy the shares at the lower price, return what they “borrowed,” and pocket the difference. (You will notice that this is strictly “game playing”– no goods or services are produced, no jobs created–no social benefit ensues.) If the stock goes up rapidly, however, the gambler-investors are forced to “cover their shorts”–to buy back the stock at a higher price.
So what happened with GameStop? According to Time,“amateur” investors who connected through a widely read social media message board “orchestrated a massive take-down of several marquee hedge funds while profiting hugely in a matter of hours.”
Not only are Wall Street players aghast with one pro saying that the moves were “unnatural, insane and dangerous,” but the surge in GameStop from less than $2 billion in market cap to more than $24 billion in a such a short time got the attention of regulators. The Attorney General of Massachusetts William Galvin said he was looking into the matter and called for a halt in GameStop trading, and the White House press secretary said that the administration was concerned about market integrity.
The blow-back against that was swift. On Reddit, one participant summed it up, “So market manipulation by federal pumping $ into falling banks & corporation is OK but Reddit users rallying GameStop is wrong and must be regulated…Funny how quickly the financial press cries for hedge funds.”
What happened in the past few days on Wall Street is akin to what happened in Britain when voters chose Brexit and in the United States when Trump was elected: a mass of people, angry at the privileged few and feeling that the system was rigged to reward the elite and screw everyone else, coalesced into a potent phalanx that upended a status-quo.
As you might imagine, the “Masters of the Universe” who were were caught off guard and who sustained substantial losses were outraged. They denounced the small, amateur investors as misguided, misled and destructive. Defenders of those investors pointed to the truly excessive profits from manipulation that have largely gone to a few thousand hedge funds, private equity executives, professional investors and their rich clients.
Thanks to the way today’s market works, a small investor who held $100 of GameStop stock would lose her $100 if the company went bankrupt. But a hedge fund might make $200 from that same bankruptcy. As the Time article points out, leverage, arcane financial instruments and access to them by only a few of the “big guys” is what makes that crazy outcome possible.
And the “victory” of the “little guys” was short-lived; as this is written, the stock has declined again, so in this particular “game” there’s been plenty of financial hurt to go around.
Bottom line, we need to add regulation of investing (aka disincentivizing gambling) to America’s “to do” list.
As Alexis Goldstein recently wrote in the New York Times, “Rather than gambling on the dubious promise of more Americans gaining access to the casino, it’s time to rewrite the rules to ensure that the house doesn’t always win.”
What? Regulation, you say?
That would require politicians and appointees who aren’t enjoying the monies coming from those who play the markets for a living. Hedge fund managers give substantial dollars to both political parties.
In fact, the Mercers, Bob, and Rebekah gave lots of money to 45 along with social media assistance. 45 returned the favor by cutting the Mercer’s tax obligations. It’s the obvious quid pro quo that slid past SCOTUS’s Citizen United ruling (specifically Scalia).
As it turns out, the Mercer’s also invested in Parler, which helped organize the insurrection along with the Koch-backed Donors Trust.
Those on Capitol Hill claiming they want to hold the insurrectionists accountable must go after the deep pockets who funded the organization to implement those actions. Otherwise, it’s just a bunch of talk while setting the stage to snatch more rights away from the American people – mainly pro-democracy, pro-equal rights, socialist, pro-union activists on the Left.
Also, while the futures, options, and stock markets are known to many. The mind-boggling gambling occurs in derivative markets. The current value of the global derivatives contracts (swaps and hedging) has been estimated at $660 trillion to over $1 quadrillion.
That’s a few hundred times global GDP.
Todd,
Excellent post!
I had read about the Mercer thing before, but the $660 trillion in global derivatives contracts?
I would have to say, that crash waiting to happen, would take the entire planet to oblivion!
“This Hedge Fund Made $700 Million On GameStop”.
https://www.wsj.com/articles/this-hedge-fund-made-700-million-on-gamestop-11612390687
Rest assured, when the oligarchs’ money is threatened, an outbreak of Congressional bi-partisanship is sure to follow.
Granted, there are inequities in whom the market serves that need to be addressed, but some things about the whole GameStop deal bother me, and I think there are some lessons that folks rooting for “the little guy” miss.
Shorting stocks isn’t necessarily an evil. GameStop stock was trading at less than $5 a share for a reason. Technology is making their service and business model obsolete, and they haven’t efficiently responded to the change. Artificially inflating their stock price isn’t going to save the company, because the stock price isn’t their problem. Other companies fail for other reasons, and shorting is one mechanism for keeping the stock prices of those companies realistic. And there’s an argument that so-called “activist” short selling is one of the best indicators of accounting irregularities at the company whose stock is being shorted.
Most of Robinhood’s revenue comes from from high-frequency trading and payment for order flow. That is, someone else (“makers”) processes the trades and Robinhood gets a cut. Who processes Robinhood’s trades? A couple of hedge funds (Citadel Securities, Two Sigma, Wolverine, and Virtu). So, sticking it to one hedge fund only enriched another. Kind of takes a little air out of the celebratory balloon, doesn’t it?
Lastly, what goes up, must come down, especially if the rapid rise is due to artificial inflation. Sure, a few folks made money on the bubble, but most of the folks who jumped on the bandwagon are losing their investment as the stock tanks (as it’s doing). GameStop stock just wasn’t worth $400 a share, and the market self-corrected pretty quickly. It all worked out for the late investors, and certainly the late sellers, like a Ponzi scheme or a pump-and-dump, and they’re left holding the empty bag. As a lesson about the evils of the stock market it was kind of “Let me make a statement about the evils of theft by cutting off my own hand.”
OK, one more thing. Colluding to jack up a stock price beyond its real value is a crime. At first glance what the WSB folks did looks a lot like a boiler-room operation. I think the SEC is going to have to decide whether the crowdsourced stock inflation we just saw falls into that category; no doubt a clever fraudster could use the same basic mechanism to gin up a pump-and-dump. (A friend suggested that the sort of crowdsourced stock inflation we saw could be weaponized to cause economic damage. Given the manipulations of social media we’ve seen over the past 5 years, that would be an interesting line of inquiry to pursue.)
Was the GameStop stock inflation a victory for the little guys? Maybe for a handful, but mostly people lost a lot of money all the way around.
The Stock Market has never reflected the economic condition of this country; only the level of wealth of the rich keeping each other rich, like the Royals intermarrying to keep their bloodline pure and the money in the family. GameStop appears to have bared to this country and the world, the shaky foundation of Wall Street.
Most investors who succeed in the long term subscribe to a long term horizon. Fortunately, it is the vast core of the integrity of the equity market. That is where the sleepability and quality of life reside.
It is not what you make but what you save. Learn to be happy with enough.
We are on occasion surrounded by short gamers who see venerable and enduring institutions such as the stock market, free enterprise and Congress nothing more than a whorehouse to be played for the benefit of quick self gratification. It works for them until they get caught with their shorts down around their ankles.
One problem with sticking it to a hedge fund is that it may also sticking it to pension funds. Pension funds, which are frequently underfunded, invest aggressively and may invest in hedge funds. People living on a pension may pay the price.
@ Patrick Sullivan – Selling short may not be evil, but what is the societal benefit of these actions? It seems that the only benefit goes to the short-seller. Just a question by an amateur investor.
I used to work for Schwab and deduced that the stock market is almost wholly illusory- with prices based on emotion and rumor and self-important pundit guesses. When people trade stocks after the initial public offering, the companies don’t get that money or benefit- it merely impacts their reputations, which might impact their ability to sell more stock one day, or not. And there are a ton of gambling-addict traders who are indeed “playing” the market, Jonesing for a big win. Those getting the big wins, however, are mostly those players large enough to game the system with their size.
I can’t say I was unhappy to see the hedge funds get a little bit of comeuppance, as their blatant disregard for anything other than their own greed should be abundantly clear, even to those who are supposed to regulate their activities. That being said, I worry about the small investors who saw an opportunity to go big, even though they couldn’t afford to lose. Many of them will lose their shirts when this is all over with.
Peggy,
“I can’t say I was unhappy to see the hedge funds get a little bit of comeuppance, as their blatant disregard for anything other than their own greed should be abundantly clear, even to those who are supposed to regulate their activities. ” You can say that, again.
I’m not a numbers person, nor a market player, but have long believed, similarly to what Michele points out, that the whole thing runs on the psychology of emotion, not hard fact.
Will this Game Stop drama lead to anything like reasonable fixes? Doubt it.
Todd, I am applauding, here.
Patrick – thanks for the Joe Friday comments.
This activity suggests serious exploration of two proposals:
1. Ban on high-speed trading run by computers. There are some brakes now, but it still is a problem.
2.HOOGE opportunity for a financial transactions tax – .1%. ” The CBO revenue projection predicts that a 0.1% tax raises $777 billion over 10 years, accounting for 0.5% of GDP. That’s significant, about equal to the revenue generated by all excise taxes including gas, tobacco, and alcohol.” Opponents are concerned that it would hurt retirees. Well, check sometime the % of stock trading done by anyone but the rich…
As a very good friend of mine would say, “If you’re at the poker table looking around to see who’s the chump, it is you.”
Back in the mid-1970’s I received a Bachelors Degree in Finance. A young Econ Professor at the time said the Stock Market was not a true representation of economic well being. Other Professors assured us the checks and balances were in place Accounting Firms that verified the accuracy of year-end profit and loss statements, big brokerage houses that acted also to “police” the companies with a rigorous analysis and than the SEC and IRS to make certain the rules were being followed.
It all seemed to explode in the 1980’s and 1990’s. The Savings and Loan Scandals, Junk Bonds Golden Parachutes, big bonuses to the top dogs based upon how much the stock price could be driven up and Corporate Raiders. Companies were expected to be “Lean and Mean” i.e., downsizing or taking their manufacturing and going offshore. Some companies even went bankrupt to avoid paying pensions and then re-organized. (This happened to my wife).
The Financial Industry became – Too Big to Fail, and Too Big to Jail.
Two notables that took a hit with jail time was Martha Stewart and Bernie Madoff. At the time the cynics opined that Stewart was a high profile sacrificial lamb and Bernie Madoff was hammered because he defrauded the Uber Wealthy.
Two people that can hopefully set things straight are Bernie Sanders and Elizabeth Warren.
Some problems, I fear, are at the end of a one-way street. We can create them but not necessarily un-create them. The equities market is one that may be in that category. It was created to and has become extremely effective at moving wealth created by the many workers to the few who collect but can’t make wealth. It’s now too big to fail or shutdown. It controls the country rather than vice versa. All of the resources involved from the people to the computers to the building space contribute nothing to the wealth of the country, they merely claim it. They have even convinced us to use their success measures as a substitute for ours. It’s as much a zero-sum game as is sports betting and lotteries.
All of this is easy to recognize but perhaps impossible to reverse. Our wealth is being drained away from contributing to any greater good.
While it seems very hard to reverse the process that was launched long ago that invented the abstraction we call equities trading we are not powerless to manage it better. One of the easiest ways is to adjust the capital gains tax to significantly higher in increments. There is some level of tax that will deflate the market significantly and move the wealth that defines it to other more productive use for all of us. Remember it’s the wages of work. It belongs to all who create it by making things of value.
I just want to endorse everything Patrick Sullivan said, particularly this paragraph:
“Shorting stocks isn’t necessarily an evil. GameStop stock was trading at less than $5 a share for a reason. Technology is making their service and business model obsolete, and they haven’t efficiently responded to the change. Artificially inflating their stock price isn’t going to save the company, because the stock price isn’t their problem. Other companies fail for other reasons, and shorting is one mechanism for keeping the stock prices of those companies realistic. And there’s an argument that so-called “activist” short selling is one of the best indicators of accounting irregularities at the company whose stock is being shorted.”
Short selling is not evil and to see people who do it as predators is just plain wrong. (By the way, everything about the stock markets suggests it is a form of gambling. In that respect, short selling is no different from other stock market transactions.) I have ZERO sympathy for those small investors who colluded to artificially drive up the stock far beyond its value and are now losing their shirt. They deserve it.
I used to get a stock bonus from the last company I worked for. The stock was a turd. It paid no dividends, and the only way the stock really moved was when the company was buying it up to give the stock bonus to the employees. In the week or two before the bonus payout, the stock price would go up. It might go up to $15 a share, so if your bonus was $15,000, you got 1000 shares. The minute and second that the shares were handed out, and hit your account, the company top brass knew about it, and they would sell immediately and from that point on, the price would drop back down to around $10 a share.
I would watch the stock price over the next year trying to time the sale on days energy stocks in general went up, and there another surprising thing happened. If reports said the stock was at $12 a share, I would sell, and it would sell for only $11.75 There was a $0.07/share charge to sell the shares on top of that.
What I found out latter, after I worked on special network connection for the people in the company finance office for a Bloomberg trading application, is that while the average price of a stock is reported by Google, etc, trades happen all of the time that are higher and lower than the average. I never got lucky enough to have a trade happen on high side, but I found out later why.
If you have big enough budget, you can buy a special high speed circuit to get direct market reports, and if you pay for enough computing power, you can make micro trades at the speed of AI computing. So, in almost all cases, the deck is stacked against any average investor.
I hope the guys that gamed Gamestop made some good money. unfortunately I am sure any regulations will be to lock out the little guy again.
Thank you Patrick for having a better view of “The Market” than many.
I agree, it is a gambling game, which I truly realized when I studied Finance and accounting in the 1970s. And yet, I was an amateur investor, losing mostly, sometimes coming out neutral.
Loved the post about coming to the poker table……..perhaps we all could benefit from looking at our own reflection more.
My company defined retirement fund, IRA, and ROTH! Are being managed by the Hedge Funds and Large Financial Institutions. I have little input as I am a minor player. However I do know they watch the market swings and imagine their shifted their “short sales” immediately to “buys” and won the game.
I would be that Robinhood, the manipulator, made a bundle in this one.
Would you not say the name of the company, “Game Stop” says it all. Talk about a pun.
Two trends changed any resemblance Wall Street had to its theoretical purpose:
First, while investors used to buy shares in companies they liked and sell them when they didn’t like them, “merger & acquisition” kings began to buy companies they didn’t like and dismantle them.
Second, the “produce nothing of value” arbitrage kings, and later “day traders”, jumped in to create new ways to treat Wall Street like a casino.
Now, that is its primary function.
The “stick it to the hedge funds” impulse does make one cheer, but reality is at some point, the real value of the company will matter and somebody, mostly “little guys” are going to get hurt.
A lesson learned from the 2000s – In the past, shares of stock were sold in 100 share lots. Anything less was considered an “odd lot” and commanded high commissions. In the ‘90s, upstarts like eTrade started to charge the same commission for odd lots. So, I bought 10 shares of Apple ($50 range) and Oracle (also $50 range). A small investment, but I could buy them with low commission and see what happened. My goal was to hold them for a long time, expecting continued growth. Then the recession hit and the prices dropped to the $30 range. I didn’t panic and was happy to hold the shares, but eTrade had other ideas. Only “day traders” and high rollers were welcome. Everyone else had to pay newly imposed high “maintenance fees”. If I asked for the shares to be issued as certificates I could keep or take to a different broker, huge fees also applied. I sold; learned – the little guy will get screwed, no matter what.
Wall Street is now a big casino, and even the “upstart” brokerages don’t want the little guy. BTW, being in IT, I know that the true cost of “maintenance” for all online accounts (no paper) is pennies – or less.
And this doesn’t even address the derivatives market that Todd brought up.
Lester – I like your ideas – they should help.
I think people are missing the point a bit. The question is whether the primary purpose of the small investors was to enrich themselves or to punish the wealthy hedge funders. Many of those small investors could have gotten out before the shorts came due and made a ton of money, but many of them held their stock anyway. This suggests that a lot of them were focused more on revenge than riches.
And I can definitely empathise. The fact that the people who caused the 2008 crisis were bailed out, and continue to this day to get bonuses and become richer is endlessly unfair and frustrating. (Conversely, people walking the streets with too much weed in their pockets could get years.) The people who caused 2008 should be in jail.