r/wallstreetbets: an underdog story
It all started with a Reddit group. “Like 4chan found a Bloomberg terminal," it reads in its tag line.
Let’s back up a bit first. Wall Street hedge funds planned on “shorting” the GameStop stock. Shorting, or short selling, is a strategy used by traders who speculate that the stock’s price is about to go down. So, traders borrow shares of stock from a broker and sell them into the market at their current price. Once the share price goes down, traders buy them back, return the stock to the broker, and pocket the difference, making a huge profit.
However, the subreddit r/wallstreetbets, stylized in popular media as WallStreetBets, had different plans. On Jan. 22, 2021, users initiated a “short squeeze” — to rapidly increase the stock price — by buying up GameStop’s shares and options. By Jan. 26, the GameStop price increased by 600 percent, foiling Wall Street’s plans, and costing them 5 billion dollars. In response to r/wallstreetbets's involvement in the GameStop short squeeze, Robinhood, as well as other trading platform companies such as TD Ameritrade and E-Trade, restricted the trade of these heavily shorted stocks such as GameStop, AMC, BlackBerry Limited, Nokia, and Koss Corporation.
These trading platforms’ restrictions on the trade of company stocks are blatant market manipulation which is unfounded and downright ironic. Preventing amateur investors from being successful goes against the “free-trade” spiel that Wall Street supposedly stands for. Now that the ones benefiting from the philosophy are normal people, who became successful at the cost of hedge funds, Wall Street is just trying to cover their backs and protect their own.
Wall Street investors are now complaining about how the gamification of the stock market is dangerous. Don’t let this fool you. Let me remind you that Wall Street has manipulated the market over and over again, often at the expense of the American people. In 2013, the New York Times reported that Goldman Sachs artificially inflated the price of aluminum, costing the American consumers more than $5 billion dollars over three years. Even in 2020, JPMorgan Chase had to settle charges after the Commodity Futures Trading Commission revealed that JPMorgan Chase was involved in "deceptive conduct" over a period of at least eight years that included hundreds of thousands of so-called spoof trades — orders that were placed and quickly canceled because they were never intended to be executed — designed to fool investors.
Wall Street even used a similar practice to today’s scenario of negative speculation to trigger the Great Recession. During the early 2000s, Goldman Sachs created packages of mortgage-backed securities—collateralized debt obligations (CDOs)—that it sold to its clients, which included pension funds, insurance companies, and various other investors. With Goldman Sachs encouraging their purchase, clients spent billions buying them and for a while made some money off of these investments. Then, according to the New York Times, “Worried about a housing bubble, Goldman executives decided to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly”—in other words not telling its clients. So Goldman Sachs started shorting the CDO investments.
When the housing market started to go bust and the CDOs did fall in value, Goldman Sachs made billions at the cost of its own clients.
So, when Wall Street investors manipulate stocks and harm people, it's “just how it is” and “free-trade;” but when Wall Street gets the short end of the stick, it's an egregious and dangerous mistake? That’s bogus. As former Secretary of Labor Robert Reich put it on Twitter, “If Redditors rallying GameStop is unacceptable market manipulation, what would you call it when greedy Wall Street bankers gambled away our entire economy in 2008 and faced no consequences?”
It's also worth noting that the actions of these Reddit users are not illegal. In order for the Securities and Exchange Commission, which regulates the market, to allege market manipulation, they have to prove the Reddit users knowingly lied about the stocks or caused unknowing people to invest in GameStop, thinking that it's true value had increased. Simply expressing an opinion or letting other people know you’re going to buy a stock is not illegal. Also, Wall Street hedge funds started this entire ordeal! They are the ones who attempted to short GameStop to make a quick buck.
I even think that the actions of WallStreetBets are a long time coming. Wall Street seems to escape punishment for most of their actions, and the little consequences they do receive still don’t compare to the amount of profit they make. For example, in 2012, the federal government settled charges of $500 million against JPMorgan for rigging electricity prices and driving up the electricity bills of Americans. But, to put in context how much harm they inflicted, in one case JPMorgan charged California utility companies $999 per megawatt-hour when the going rate was only $12. This is perhaps Wall Street finally tasting consequences — ironically as a result of a page from their own book — and to put it blatantly, it is quite refreshing.
Although shorting and short squeezing are both extremely risky practices — and it's unsure how far the Reddit investor will go — it is a small victory. Finally, small investors are benefiting from the stock market instead of being marks for hedge funds. Because of this, I hope these small investors are more careful than ever to not gamble away their new earnings back into the hands of Wall Street. While the actions of this community may not radically force the manipulative culture on Wall Street to change, I think it is a step in the right direction in making Wall Street a place for everyone — not just the uber elite. Sometimes, we need to root for the underdog.