Regular people found a way to exploit hedge funds in the same way hedge funds have been exploiting regular people. Pay attention to what happens from now on. Whether you care about the stock market or not, this is a historic moment.
First, a reminder that Gamestop (GME) employs over 15,000 people.
Large funds have been shorting Gamestop’s stock and slowly driving down the price while profiting for some time now. This is bad for Gamestop as a company, but makes money for the funds that are doing it. It makes so much money that the funds keep doing it, and keep doing it, until they are functionally “all in” against Gamestop. After they go all in, they employ some additional, somewhat unethical tricks to lower the stock price further and make more money. The funds are comfortable doing this because they have such a large amount of capital betting against GME that they feel like no one else has enough money to compromise their position.
They were wrong. Here is where Reddit comes in.
People on an internet community called r/Wallstreetbets used publicly available information to identify the aggressive position taken by the hedge funds and came up with a plan to defeat it. No one individual had enough money to buy the shares needed to raise the stock price, but if they all separately bought what they could, it would start things moving in that direction. People bought the stock and the stock price went up, so people bought more stock and the stock price went up even more. The money wasn’t coming out of nowhere, it was being taken out of the pockets of the funds who had bet against the company and lost. It really is that simple. Hedge funds made a bet that the stock price would not go up and that no one could change that. The public gathered together on the internet and collectively proved them wrong.
To counteract this, these large funds got their friends in the media to badmouth the public and say they were wrong and irresponsible. In response, people bought more stock and cost the funds more money.
Then the funds got on the news and spread lies, saying they had lost and were closing their positions hoping that regular people would take what profit they had gained and go home. The funds had never closed their positions, and people saw through this lie.
In response, people bought more stock and cost the funds more money.
The funds then went to the SEC and begged for regulation of regular investors, saying that people are too erratic and shouldn’t be allowed to take their money this way. They claimed that people using the publicly available information to beat them was somehow “hacking.”
In response, people bought more stock and cost the funds more money.
Having run out of options and feeling pressure from the very powerful people investing with them, the hedge funds decided to lift the veil of the fair market and change the rules of the game entirely. They turned to robbery.
Finally, many brokerages shut down trading in only one direction, allowing only sell orders of GME. This created a market condition where only large investors who were already betting against the company could profit. The brokerages said trading was shut down in this way to protect consumers, but this is not true. If this move was made to calm down market volatility, trading could have been paused in both directions.
This was a coordinated effort between large funds and brokerages to try to scare off retail (normal human) investors and recover the billions being lost by the hedge funds. In response to this, regular investors did not back down and vacate their positions, but held, even though it might cost them money, because holding was the most effective way of protesting the actions being taken.
For maybe the first time in recent history, regular people have found a way to protest in a language that citizens, corporations, and the government can all understand and respect.
The outpouring of bureaucrats and companies in response to this issue is no mistake or phenomenon. It’s because they cannot teargas or beat money into submission, they cannot arrest and silence it. Many of the politicians and public figures who will be coming out of the woodwork will be doing so not out of a legitimate desire to correct the problem, but because they cannot think of a way to cleanly sweep it under the rug as they might prefer.
Without violence as an option, all of the people who once considered themselves our masters will need to choose sides. Our government will either regulate away the last effective means of speech left to a fettered population, the right to speak with our wallets, or they will side with the people—and in doing so admit that we were the ones with the power the whole time.
At the end of this, when all the dust has settled, if things go the way of the people, the final tool in the bag for these firms will be to request a bailout from the government. If this happens the public response MUST be an emphatic “No.” Never let them shift their debt back to the public. If a regular person makes a deal with a broker and fails to follow though, the government will waste no time coming after his assets or employing violence in response. The rules should never be different based on worth.
TL;DR: Don’t make bets with money you aren’t willing to lose and never welch on a contract.
[…] by Dylan Griffith […]