Any hope that America would regain its senses and become collectively sane again following one of the most tumultuous periods for the country in at least five decades went out the window this week.
What should have been a fun, anecdotal story about retail investor camaraderie morphed into a highly contentious, national scandal by Thursday afternoon.
Just days ago, it seemed like a ridiculous stretch to equate the sentiment smoldering among legions of small-time stock traders on Reddit to the Capitol riots. By Thursday, the word “riot” was commonplace in the discussion.
And “discussion” really isn’t the right word. Americans don’t have “discussions” anymore. The drama surrounding this week’s manic price action in shares of GameStop, AMC, and the like, sparked ridiculous vitriol on social media.
Meanwhile, outlets like Bloomberg fanned the flames, publishing dozens upon dozens of stories in rapid succession. The blanket coverage doubtlessly prompted more retail traders to get involved.
At one point, GameStop passed Plug Power to become the most valuable stock in the Russell 2000. Around 10 AM in New York, it was worth almost $40 billion.
At that juncture, the stock’s 2021 rally totaled near 2,000%. As Bloomberg wrote in one of countless articles, it was “bigger than more than half of the companies in the S&P 500.”
The self-referential character of it all was on full display Wednesday afternoon when the financial media cited Jerome Powell’s reluctance to engage and the Biden administration’s “monitoring” of the situation as “proof” of how earth-shattering the story really is. Never mind that the media’s own coverage and questioning was what prompted officials to weigh in. Once one official speaks (or, in Powell’s case, refuses to), others are compelled.
Now, lawmakers are calling for hearings.
“This is unacceptable. We need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade as they see fit,” Alexandria Ocasio-Cortez seethed, after platforms implemented trading restrictions ostensibly aimed at restoring order. “As a member of the Financial Services Committee, I’d support a hearing if necessary.”
“Absolutely,” Elon Musk responded. “Fully agree,” Ted Cruz chimed in.
My own well-known affinity for Ocasio-Cortez (and her “sisters”) notwithstanding, this is political opportunism at its finest. Effectively sidelined by a Democratic leadership terrified by her potential, Ocasio-Cortez will gladly leverage opportunities to prove her populist bonafides to voters. Recall that she spent part of inauguration day wielding a bullhorn on a picket line with the Teamsters. Taking up the cause of the Reddit traders gets her a lot of “bang for the buck” in terms of political capital with young voters.
Nancy Pelosi was much more reserved, calling the situation “interesting.” “I understand that the administration is taking a look, the SEC is taking a look,” Pelosi remarked. “We’ll all be reviewing it.”
The juxtaposition with Ocasio-Cortez was stark.
“Enemies make strange bedfellows. Lock em’ up,” Dave Portnoy wrote, retweeting Ocasio-Cortez. “The decisions that were made at Robinhood today should land everybody who was involved in those decisions in prison,” he added.
Everything is now “us versus them” in America. Someone always needs to be “locked up.” There’s always a bad guy. Everyone’s always a victim in their own minds.
In reality, nobody (that I’m aware of anyway) was terribly distraught at the prospect of retail investors making some money by turning the tables on people who have plenty of it. That was never an issue. But by Thursday, the situation had spiraled not just beyond GameStop, but beyond markets entirely.
Suddenly, America found something else to argue about. Once the short witches were burned, it was time to haul executives from trading platforms up to Capitol Hill. Meanwhile, regulators are probably looking into the who, what, when, where, and why when it comes to how this all got started in the first place.
There are always “good people on both sides.” Or didn’t you hear?
In a statement, Ro Khanna (who represents California’s 17th congressional district, in the heart of Silicon Valley) chided the same disparity in access to markets. “While retail trading in some cases, like on Robinhood, blocked the purchasing of GameStop, hedge funds were still allowed to trade the stock,” he said. Khanna is a member of the Congressional Progressive Caucus.
Edwin Groshans and Hunter Hammond, analysts at Height Capital Markets, underscored the notion that the GameStop saga had become yet another manifestation of the same political dynamics that have gripped the country for nearly a half-decade.
The price action in shares of Bed Bath & Beyond, Build-A-Bear, BlackBerry, Tootsie Roll, Nokia, Express, and AMC (among others) suggests “populism [is] permeating another American institution – the stock market,” they wrote.
“It may be easy to dismiss recent trading as a pump-and-dump, simple momentum, or idiocy – and looking back it may be all of those things – but a review of many threads on the subreddit r/wallstreetbets reveals something deeper,” Groshans and Hammond went on to say. “In many of the posts, Redditors displayed anger at hedge funds, anger at older generations, anger at financial media coverage of the WSB forum, and a desire to punish those in charge.”
On Thursday afternoon, Robinhood found itself named as a defendant in at least two lawsuits (here and here). The platform’s decision to halt trading in some of the names involved in this week’s drama “was to protect institutional investment at the detriment of retail customers,” one Naperville, Illinois, resident alleged, in a suit filed in Chicago.
As The New Yorker put it this month, “the storm might be here.”
To say that RH handled the situation poorly is an understatement. They deserve to be sued (though not locked up). I mean a 48-hour heads up would’ve given evryone time to adjust their positions in a way that was fair an equitable; instead, RH did the opposite.
Interesting point, fair, but I think panic might be understandable when GME shot to $600. After all, RH will/would also be blamed when most of these retail guys lose their shirts.
Robinhood was actually SELLING people’s GameStop shares today, without their knowledge or approval – at the absolute low (like $115) – “for their client’s benefit, to mitigate their risk.” They’re going to get their asses sued off. Maybe they should change their name to “Nottingham.”
Yeah. I doubt politicos and even Bloomberg journalists are that distraught at HF billionaires getting screwed. But this thing started to affect the wider market, via the long unwinding chronicled by our host. I mean, the portfolio I oversee is very concentrated in tech stocks (and, yes, 2020 was very good to us but we’ve been following this strategy since 2016) and I have stocks moving 5% in a day (up and down, for a mixed results). Look at ABNB or OKTA or CRWD or API… Those moves feel… jittery, unusual.
And that’s before we even get to the vol. pros having to unwind.
In short, reddit small investors discovered that, if they all put their weight to one side of the plane, they can tank it.
IMHO, this shows this plane either ain’t designed well enough or sufficiently regulated (and, yeah, I groan at the idea of yet more compliance surrounding stock trading).
But no one should be allowed to manipulate the market for profit. Not even a crowd of justifiably angry guys, loosely coordinated on reddit…
this shows the plane either ain’t designed well enough or sufficiently regulated
Or maybe people are too levered and/or taking on too much risk. Both were true in 2006-08, and instead of paying the piper, most of those who get caught with their pants down were allowed to skate. Not exactly what Schumpeter had in mind.
Point well taken. You won’t find me defending bankers etc. from that debacle.
Basically, all I am arguing is that, just as the Fed didn’t really have a choice in intervening and trying to support the system when the fiscal authorities (and judicial ones) went AWOL in 08 09, authorities/RH isn’t exactly wrong in intervening now.
But that’s treating the symptoms, not addressing the root causes, no arguments from me on that front.
Bring back trading commissions!
Only if they are related to the quantity bought or sold, otherwise you are being discriminatory – big guys, little guys.
Were they ever not related to the size of the order?
But high commissions discourage trading. Which means people have to look at investing at least as much as trading. And, of course, killing HFT would be a Good Thing (TM).
I prefer market makers with strong balance sheets to dark pools of jittery money for my liquidity provision…
+1
I don’t remember who (Sanders, Warren?) have discussed a tax on gross proceeds, something like 0.1% or may be even 0.5%. This would be fair to all sorts of guys.
A Tobin Tax. And that was a revival of a Keynesian idea. It’s been mentioned often in some circles but never implemented correctly enough.
In a world without justice, vigilante justice is taking form. We’re well into self-destructive territory and the milieu is only going to become more revolutionary with all the improper reactions by the corporations and institutions. Institutions do not understand the psychology of riots. James Baldwin brilliantly articulated the psychology of the Detroit riots along the lines of ‘if we’re not allowed to have any, than neither shall they’ as people became so desperate and oppressed that they were willing to burn down their own neighborhoods. America better wake up fast.
I wholeheartedly agree with AOC.
A few things are clear- and not just from this incident but from others. Robinhood is not a well run or respectable firm. There was soft collusion on trading on a lot of these names on chat boards. A moratorium on trading on some of these names was probably a proper approach- as long as notice was given – one trading day would have been sufficient. Alternatively the SEC should be pondering a circuit breaker set up for individual stocks along the lines they do for the overall market. A 15% move triggers a 1 hour pause, 30% triggers a 2 hour pause, 50% shuts down trading in a name for the day as examples. I believe the complaints from retail traders have some merit about the trading halt, had notice been given then there would have been no reasonable argument versus limitations- and it should have been more widely applied. I agree that the primary problem with this type of trading is the colluding aspect- never good when anybody or any group does it- chatboards bros, hedge funds, street or anybody. And it has shown it can artificially destabilize financial markets. As for AOC, she is getting a little bit big for her britches. She is bright, educated, personable and is a very intuitive politician. But she has a tendency to make specious decisions sometimes- Amazon for Queens comes to mind- that was a incredibly dumb decision. She is also getting way too much media coverage- fact is she is a 2nd term back bencher- a bright future possible but really green in terms of policy making or governing chops. She will probably get much more heft as she matures and gets more responsibility. However, she is starting to look like someone appealing to grievances that maybe are not always so legitimate sometimes.
Do a politician eyeballs or everything. Content is all together unimportant. Trump understood this seems AOC has got it pretty well under control
Trump had it under control until the mob he encouraged stormed the Capitol. So content doesn’t matter until reality comes along and teaches you a lesson…
What you call her ‘incredibly dumb decision’ on Amazon was in reality opposition to a backroom, handshake deal to subsidize one of the four largest companies in the world with $3B of NY taxpayer money, which would have also displaced communities of thousands of people who stood ‘in the way of’ development in her district, and had no accompanying plans for job training or displacement that I am aware of. She is not your representative — she is theirs, and she stood up for them. Amazon could have offered a better deal, or at least ‘engaged’ with the community it attempted to invade. But it preferred the beauty pageant contest of who could stroke Bezos’ ego the best. She opposed it to protect her “current” constituents, the people who put her in office, people very much like herself. By the way, they overwhelmingly voted to give her another term recently. Isn’t this how representative democracy is supposed to work? And by the way, New York needs that $3B right about now, doesn’t it?
Great comment.
Well said.
PSA: A few people have attempted to post long, extended block quotes from Reddit in their comments here.
Please don’t do that. Thanks in advance everybody.
Again I have to ask: what is the purpose of stock markets? In a capitalist democracy, it is valid to regulate markets to ensure that they run smoothly and fairly, and to align them with the interests of the society–to foster investments in infrastructure, for example. Day trading and other excesses are not necessary, and to the extent that these activities are destabilizing, they should simply be banned. I would let Elizabeth Warren choose the head of the SEC and whatever other agencies are relevant, and then let them have free reign. We’d all be better off for it.
RH- is it ever a good idea to give your money to a company whose CEO is named Vlad? Just askin’.