The GameStop trading phenomenon of these past few weeks may be one of the most perspective-shifting events in Wall Street history, and I’m happy I didn’t participate.
I fully believe almost all of what is happening is perfectly legal. There is no law prohibiting the discussion of stocks on a public Reddit board to generate enthusiasm. Jim Cramer does virtually the same thing on his CNBC show, the key difference being his viewers don’t follow through nearly as well as the Reddit crowd. Additionally, this poor man’s pump-and-dump is just a residual event of the larger democratization of investing trend, which is long overdue and could dramatically improve the financial outlook for lower and middle class families in the long run. I give Robinhood all the credit in the world for laying the cornerstone of this movement. However, if this last week-and-a-half has shown us anything, it is that we cannot continue to regulate and define the role of today’s stock market based on yesterday’s concerns and perspectives.
While the public nature of this pandemonium doesn’t qualify it as insider trading or a pump-and-dump, it’s still pretty clearly collusion in a market place. Efficient markets rely on individuals making decisions that are best for themselves given all the available information. Efficient markets rely on asset prices that accurately reflect the underlying value of the asset being exchanged. Banding together to artificially shoot the price of a flailing retail chain’s stock over 18,000%, while funny, is a financial mob mentality that at scale destroys any chance a market has at being efficient. The internet has made banding together in this way easier than ever, and I believe regulations need to be changed to reflect these new opportunities for social media collusion even if the information being shared is technically public.
However, this crackdown on collusion should apply to Wall Street hedge funds and banks too. The genesis of this entire GameStop episode was as a middle finger to greedy hedge funds, and although I can’t say I’m the most informed person on this particular matter, I imagine the gesture was with relatively strong reason; using immense collective market power as leverage to make more money and grow more power is surely a tactic used by hedge funds and Wall Street banks quite regularly. These institutions also have much easier access — and sometimes exclusive access — to lucrative investing opportunities like IPO underwriting that individual investors could never dream of participating in. The fundamental principle of what the original GameStop fanatics were saying holds true: the wealthy should not play by a different set of investing rules than the poor. But the solution to big banks skirting the rules is not to disavow the rules altogether; it is to crack down on those banks.
Leaving the big financial institutions out of the picture, we are left with the Robinhood investors, all of whom can generally be grouped in one of two different phases of this phenomenon. First were the original WallStreetBets readers who were solely interested in showing up the short sellers. Even though these individuals clearly have the most potential to make money – many of them bought the stock at a double-digit price — they are not interested in personal profit. They have collectively vowed not to sell the stock. Assuming they follow through on this promise, which in itself may be a bold assumption worthy of a Golden Balls episode, these Phase One investors are setting a price floor for where the short-term stock price will ultimately land. (Although since GameStop is still GameStop, these investors will eventually sell too, and the stock price will likely return to what it was when this whole hurricane began.) Once these Phase One investors sent the price skyrocketing, the Phase Two investors — those seeking to financially capitalize on a ripe opportunity— bought in as well. This group understands and supports the motivations of Phase One but is more concerned with profiting off GameStop’s continuing spike.
The Phase One investors have very little on the line; they had no real intentions of making money in the first place and will not be hurt too badly by the eventual price crash since they bought at a very low price anyways. However, the Phase Two investors will at some point have to recon with the fact a portion of their wealth is now held inside GameStop stock inflated to Zeppelin levels. In other words, the only ones interested in making money are also the heavy favorites to lose the most. They can certainly sell it at the currently astronomical price and turn a profit, but once the selling starts, it’ll be a rat race sell-off as other stock owners try to beat the crash. And it is worth remembering that no one has made a penny until the selling starts. Eventual profits necessitate that this mass sell-off occurs. Until that point, the stock price will probably continue to fluctuate around the Phase One price floor and some other arbitrary and yet constantly rising price ceiling. Any attempt to predict these fluctuations and try to make a quick buck is pure, unadulterated gambling. Sense, logic, and skill left this equation way back when the stock price stopped being derived from future company success and started being derived from rogue meme culture. In other words, you’re not an investing idiot if you lose money on GameStop stock; you’re an investing idiot if you think it is even investing.
Some might argue that the continued hype is only driving the price up further, making it a much safer play than straight gambling. This may be true to some degree, but that only leads to an arguably even more taboo classification: a pyramid scheme. And this is honestly a more accurate way to envision the whole ploy. The odds you make money are reasonable, provided there’s enough people entering the scheme after you to give you a cushion. Whoever gets left near the top of the pyramid — those who either bought at the peak or sell at the trough —will lose their shirt. And since everyone is buying and selling at different prices with different strategies, it’s nearly impossible for these later investors to figure out where they lie on the overall pyramid. You may have 500 investors above you in your personal pyramid and yet also be in the top layer of the personal pyramids of 500,000 other investors. At that point, let the sell-off race begin. It’s no stretch of the imagination to assume that when the dust settles on this ordeal, half of those involved will make money and half of those involved will lose money. The rules of the market have not fundamentally changed even if they are being applied in new ways.
As I said before, I entirely support the democratization of finance movement. But even if trading commissions have all but disappeared, the risks of the market remain the same. It’s not a financial playground. The educational barrier to entry isn’t necessarily high, and resources to cross this barrier should be made accessible to all. But once more complex and risky trades come into the picture — options, short selling, or buying GameStop stock at an over 10,000% premium to what it’s reasonably worth — failing to adequately overcome this barrier could be unspeakably detrimental. We’ve already seen at least one Robinhood suicide. We don’t need to see more.
I’m incredibly fearful that the individuals who do happen to make a profit from this episode will get a completely unwarranted confidence, suddenly seeing themselves as bedroom Wall Street wizards. Being overconfident in the stock market is extremely treacherous water to be trading in, especially when those individuals don’t have the baseline knowledge to be trading in the first place. I understand that hard lessons are the most impactful, but even if I’m completely behind Robinhood’s mission, it’s still scary to imagine how few steps it could theoretically take for a clueless investor to go bankrupt. Robinhood’s greatest allure — its open borders — is also its most worrying. Any system intentionally designed to allow such hard lessons, while permitted in a free society, still should be scrutinized to make sure the positive social impact — the opening of Wall Street’s gates — outweighs the negative social impact — the permanent financial scars that can be left on uninformed traders.
The GameStop catastrophe succeeded in embarrassing Melvin Capital, but at least in broad strokes, it has overwhelmingly failed in transferring wealth from the rich to the poor. Money is changing hands — but only from poor Robinhood users to other poor yet marginally more naive Robinhood users. Closing the wealth gap is a movement worth fighting for; capitalizing on the callowness and misfortune of people in your own income group isn’t. I am still of the idealistic opinion that when business is done right, success does not have to be predicated on the direct suffering of another. This crosses that line for me. I’m going to sit this one out.
留言