In January 2021, stories about an American chain called GameStop started appearing in the news. GameStop is a bit like a GAME equivalent – it sells games and consoles, but is otherwise unremarkable, so the fact that it was making international news and trending on social media was a surprise. Even more surprising was that the stories were about how amateur investors in this small chain were taking down Wall Street.
To put this story into context, we need to start in an unlikely place: September 17th, 2011, with the birth of Occupy Wall Street. Hundreds of occupiers took over Wall Street in anger of what the world had become since the 2008 financial crisis, and in protest of the growing economic inequality. Their slogan, “we are the 99%” demonstrated how the system only served the one percent and that the economic and political crisis could not be blamed outside force.
Vladimir Tenev and Baiju Bhatt, who were both working in finance at the time, were inspired to come up with a way to ‘fix the rigged financial system’ and open up access to the stock market to the 99 percent. They created Robinhood, a commission-free trading platform app. The name ‘Robinhood’ conjures up this idea of almost a vigilante redistribution of wealth, and in some way this was their intention. Their slogan is “we’re on a mission to democratize finance for all”.
By the end of 2020 there were around 13 million Robinhood users, suggesting that the app really was opening up the market for ordinary people. But by the end of January 2021, the limits to this democratising mission were laid bare. In Ours to Hack and to Own, Nathan Schneider writes “when a new app is said to be democratizing something… it means allowings more people to access something. Just access, along with a big fat terms of service. Gone are those old associations of town meetings and voting booths; gone are co-ownership, co-governance and accountability.” In the case of Robinhood, this is remarkably on the nose.
The protagonists in this story are a group of amateur investors in a Reddit forum called /wallstreetbets. This is an anonymous forum where people share (usually high risk) trading tips, and many members use Robinhood as their trading platform.
From late 2020 to early January, 2021, members saw that GameStop was being undervalued, and that ‘short sellers’ were buying up stock. Short-selling (or shorting) means that an investor bets that a company will fail by borrowing stocks and immediately selling them. If stock prices fall as predicted, they can then buy them back at a lower price, making a profit. The problem with shorting, is that if the share prices actually rise, then investors have to buy back stocks at a higher price and lose money – and the losses are unlimited because there is no limit to just how high a stock price can rise.
The Redditors saw that this was happening, and were angry at stockbrokers profiting from the failure of GameStop. They began to buy up stocks, driving up the share price in what’s known as a ‘short squeeze’. For the Redditors, this meant that their shares were worth increasing amounts, with their value increasing by 1500 percent. This was more than a chance to make a quick buck, many saw it as an opportunity to reclaim the wealth stolen during the 2008 financial crisis. The activists began buying up billboards, including in Times Square, which mocked the hedge funds and invited others to join them in the short squeeze. For the hedge funds, it was a disaster. By 26th January, it was reported that short sellers had lost $6 billion.
On the 28th January, Robinhood, halted the sale of GameStop stocks, along with several other companies that were targeted by /wallstreetbets. Users were still able to sell their stocks, but buying was prohibited, causing the share price to plummet. Robinhood claimed that this was due to their lack of collateral to pay the clearinghouse deposit (Robinhood has to pay a deposit from their own money at a clearinghouse to cover trading risks), but others argued that it was simply market manipulation that served the interests of the hedge fund managers.
This is a perfect example of Scheider’s argument that by only opening up access, “democratising” platforms are not democratising at all. Democracy, as Erik Olin Wright puts it, is about having the power to change the rules of the game, not just being invited to play. Robinhood did allow more people to participate in the stock market, but it didn’t give them any ownership over it.
In this case, the /wallstreetbets traders were following the rules, playing the same game as stockbrokers have for years. In an interview with the Intelligencer, former stockbroker turned photographer and writer Chris Arnade explained, “That’s applauded behavior on Wall Street. You’re outsmarting the room, and you’re telling people that you’re outsmarting the room. In many ways, that’s what happened on Reddit over the course of the last six months. But it wasn’t done by one firm; it was done by 2.3 million self-described degenerates.” As the balance of power shifted, the game was under threat. By closing down the market to ‘small investors’ trading GameStop shares, it was painfully clear: this is our game.
Even before it halted trading, Robinhood has never been about wealth redistribution. Although it is commission free for users, the platform makes money through payment for order flow (PFOF). This means that when you make a trade through Robinhood, they pass on that trade to a hedge fund (Citadel) for a commission, who then complete the transaction on your behalf. Robinhood makes money, and the hedge fund makes money. Yes, individual users may make money through investing, but this is not redistributive. The more users the app has and the more trades taking place, the more money flows upwards.
It’s also worth remembering that finance can never truly be open to all: it is only free to those that have the ability to take on risk. This isn’t just true in the stock market, but in all forms of saving and investing. Furthermore, managing that risk is seen an expertise. It is like a science that only certain people are qualified to participate in – meaning that only some people are allowed to play the game. After closing the market was no longer an option, Redditors were reminded that despite many people making large amounts of money, there was a chance that they could lose all of it at any moment. Just one example of this was when William Gavin, the Massachusetts Secretary of the Commonwealth said, “many have gotten into day-trading and really have no idea exactly what they’re doing … I think small-time investors like that, unsophisticated investors, are going to be hurt by this”.
Since the short squeeze, there have been widespread calls for greater regulation to avoid market manipulation and to reduce volatility, but to me this doesn’t seem like the answer. Yes, it is important to stop the super wealthy from treating “the stock market like their own personal casino” (as Elizabeth Warren puts it). But wouldn’t it be more valuable to find other ways to create money and invest in business? We need to completely reposition finance in society. As Kate Raworth writes in Doughnut Economics, “It’s time to turn this upside-down scenario the right way up and redesign finance so that it flows in service of the economy and society”.
The GameStop short squeeze did shake the foundations of the stock market, but it also showed that unless you take down the whole system, it will always regenerate itself. As Alexis Goldstein pointed out, “maybe you’re sticking it to one hedge fund. But Citadel went and then bought the hedge fund that the Redditors think that they caused to go under.” The game is always rigged.