If you’re like most, then your knowledge of the stock market hasn’t extended far past pictures of ‘men in suits’ garishly dealing in Lower Manhattan, or Leonardo DiCaprio’s Quaalude addiction in The Wolf of Wall Street. But somehow, through an endless reel of twisted events already plaguing 2021, the righteous masses have taken hold of The Stock Exchange with an iron first, at the mercy of its biggest players. It’s caused a journalistic and political frenzy, haunted by the prospect of a new status quo in economic power.
Last week, international media was dizzied by the news of a once-sleepish Video Game company, ‘GameStop’, becoming the pinnacle of any professional trader’s nightmares.
Originating from the Reddit chain ‘re/WallStreetBets’, traffic initially began in an effort to save the rusting high-street games retailer, before switching channels to topple some of the largest Wall Street Hedge Funds, by increasing the market value of failing businesses they place bets against in order to profit from their losses.
It’s a fairly straightforward, morally questionable process; Professional investors and Hedge Funds practice ‘short selling’ – to borrow shares of predictably failing companies and selling them, to then buy them back again at a diminished price, creating a profit on each stock as its market value decreases. If one stock is initially sold at £10 with a predicted value decrease of 20%, it is then bought back at £8, creating £2 profit.
In the case of GameStop, as swathes of retail investors start swiping it up, the market value increased, meaning Hedge Funds are instead making a loss as they begin to buy the stocks back. While it closed at $19.94 in the earlier in January, this had catapulted to $347.51 by the 27th.
It’s a risky game to play, so potential losses are covered through what is called a ‘Short Squeeze’ – buying more of the stock at increased value to create capital. Howbeit, because of its swelling popularity (there was a near 100% acquisition of GameStop shares), this wasn’t possible, creating immense loss, that of billions for some firms. Take Wall Street giant Melvin Capital, who’s major-league short-selling in GameStop led to a loss of $7 billion. It had to receive a $2.75 billion cash injection from some of their biggest rivals.
The event was taken to be a siege against one of the most influential capitalist systems and inevitable became politicised. The result of consistent financial setbacks and oversaturation of mistrust by the majorities towards the rafters of power, as the chaos of our times continues to unfold. We must hesitantly ask: is this the start of a modern-age, esoteric class war?
Short-selling heavyweight Jim Chanos told The Financial Times this blast to Hedge Funds and Wall Street traditionalists was shocking – a part to the cycle of lament such firms have been victim to since the aftermath of the 2008 financial crash.
Taking more reprehensible actions, American trading app ‘Robinhood’ stopped trading in GameStop and other hotbed stocks altogether, in response to ‘unprecedented times’ and ‘market volatility’. This was quickly followed with an outcry of hypocrisy, having ceremoniously marketed themselves on creating a stock market for all, before swiftly changing their tune, now that it’s the yacht-hoarding, Armani clad ‘men in suits’ who are losing, and not the gullible day traders. What followed was a cash injection over $3 billion, lawsuits from traders, a hefty grilling from Elon Musk and a request for CEO Vladimir Tenev to testify before congress.
It was a potent reminder of frequent cutting of corners and a carousel of (quite literal) get-out-of-jail-free cards finance’s commanders have received for decades, from both sides of the political agenda – bailouts from the Federal Reserve to the puppet masters of the housing market crash, and those that followed, unbeknownst to Congress.
What was most mind-bending was an unexpected moment of partisanship between The Capitol’s two most antagonising law-makers. Notorious republican figurehead Ted Cruz – who is otherwise making headlines as subject to a closed-door senate investigation into his claims of fraudulent voting in the 2020 US presidential elections – retweeted democratic opposer Alexandra Ocasio-Cortez, as she called for Robinhood’s accountability, despite AOC being a leader in the rally cries for his resignation.
We must, however, pause to contemplate whether such bold action is the most effective way in which a balancing of power is achieved, regardless of its short-term fulfilment of any populist’s wildest dreams. To acquire fermenting stocks at such a rapid and hysterical pace could hurt the stock market in more critical ways. The movement, having been built around novel excitement, quickly curtailed its activity over the weekend – GameStop value dropped by 65% on Tuesday (2nd Feb) – explicating the naïve and faddish uncurrent. Nonetheless, this happened after restrictions of Robinhood’s flavour were imposed in many other broker venues, creating ripples through a complicated game of tug-of-war between seasoned regulators and the newly inducted.
Chanos warned that this is part-and-parcel of novices thinking they can master a commonly oversimplified system, with this instance tipping the scales a bit too much, having emerged from a fidgety zeitgeist. Investors think ‘they’re being held back from their rightful place at the table by these evil hedge funds’, which, in some measures is true, but in others we must realise the table is, in essence, open to contenders.
Even so, such happenings have surely laid a nugget of hope in many young minds. It’s a reminder that, when facing a future we know to be turbulent, it’s possible to have some hand in the institutions dictating it. While we still stand mystified on the pavement, in the skyscrapers above we see small cracks growing in the windows, ready to cave in on those still dancing to their own tune.