Where I try to REALLY understand a (maybe) watershed attack to stock markets.

What “GameStop” is about, in case you missed it

Around January 27, 2021, a “rag-tag internet crew” was winning the day at Wall Street- “at least for now”, with “gains since the start of January to 1,745%". The crew exploited a well-known, perfectly legal gambling technique called “short selling”, using as chips the stocks of a gaming retail company called Gamestop.

The crew gambled well enough, big enough, to make huge financial companies lose billions of dollars. Of course, this was not the first time that something similar happened. It just was the first stock gambling stunt “orchestrated by a bunch of loosely affiliated social media users acting on a meme”. The gamblers traded stocks for free thanks to a free app called Robinhood, coordinating their actions on public forums, on Reddit and Discord.

Why they did the Gamestop thing

Surely, some members of the “ragtag crew” did it for the money (1,745% gains, remember?). The majority, however, seems to have done it just to hurt as much as they could, a financial system that is, to say the very least, extremely unbalanced:

• “The free market is only free until rich people lose money."
• This is the public saying “we’re sick of this, we’ve had enough, we’re getting organised and we don’t care”
• “I did this to avenge my dad, and I don’t care if I will lose money! I’ll burn it all down, just to spite them” (continues in this screenshot)
• This is “Occupy Wall Street (OWS)”, [finally] done right!

The “done right” part of the last bullet would deserve much more reflection and debate. Because, right or wrong, it means just what S. Galloway said: “we’re relying on Reddit to be a corrective force the way we relied on Twitter or Facebook to shut down Trump. We don’t look to government institutions to figure out if and what dangers [stock trading] presents. Our new government is Big Tech."

For the record, that last bullet was also my first personal feeling when I heard what was happening: “this is Occupy Wall Street, just done much more effectively than squatting in a public park”. Others refuse this interpretation:

“you didn’t have people coming to [that] park to get rich, they were coming to get their needs met… Can anyone really claim with a straight face that the GameStop action is motivated by anything other than desperation & greed? It seems like the sole intention is to get rich, which only strengthens the concept of private property."

Personally, I do not know if this picture is more accurate than the “Avenge my dad” one. But to tell you the truth, I don’t really care. Keep reading to discover why.

Who really [probably] won with Gamestop

Evgeni Morozov has called the Gamestop stunt a “perfect example of platform populism”: a movement that, “featuring no coherent political ideology of its own, is all about process, not outcomes."

Morozov also noted that “the only long-term gains of this process would accrue to other hedge funds, such as BlackRock, which is estimated to have made billions on the GamesStop rush."

Others have argued substantially the same thing. The Reddit “ragtag crew” may have been just puppets “on the sidelines of a trading war among a handful of big institutional investors…. In effect, hedge funds may have manipulated GameStop in opposite directions, wringing out profits daily or even two or three times a day. If this is correct, the GameStop saga is not some populist uprising but a rolling version of “pump and dump,” a classic form of manipulation [of the stock market]."

Regardless of their intentions, that is, the Reddit investors would be just a David, worn as fig leaf, by a Goliath figthing another Goliath:

“All of this is only possible because Robinhood lets average joes buy and sell stocks for free. How can Robinhood [do that?]… Surveillance. Robinhood partners with institutional investors and lets them spy on what the average joes are buying and selling."

“Sometimes, this is just market intelligence (“Hey, people like fidget spinners”) but the main event is front-running. If you’re paying Robinhood to tell you what assets its customers are about to buy, you can go out and buy them up first and sell them for a profit to Robinhood’s customers. Or you can buy some of that asset up because you know its price will go up once Robinhood’s customers orders are filled."

The Restoration: keep the outsiders out!

I mentioned at the beginning that all the crew needed to screw Wall Street was online trading and social networking. Obviously, as soon as it realized what was happening, Wall Street acted to neutralize those weapons.

Forced by “new collateral requirements”, Robinhood forbade its users from buying GameStop and other stocks that could be exploited in the same way. Even more interesting, or at least more on topic here, is another “Our new government is Big Tech” factoid: Discord banned the WallStreetBets account… “with motivations nearly identical to the one given by Google, Apple, and Amazon for deplatforming Parler just three weeks earlier”.

So, if there is one thing you can safely bet on right now, is that mistrust in “the system” and cries of “The free market is only free until rich people lose money." will increase. A lot.

What next?

As far as I understand it now, this post (deliberately purged of all the technical and financial details) is a decent summary of who “played” with Gamestop in the last week of January 2021, and of their motivations, tools and (so far) final scores. But there is more. To know why this may have happened, and what is the things that really needs fixing in the Gamestop mess, read the conclusion of this summary.