Market Manipulation Is for the Elites — Not the Peasants
I'll be honest — covering the stock market isn't always exciting.
Amid the massive hits and tragic misses, the fortunes made and lost every day, there's a mind-numbing amount of banality.
The humdrum earnings reports, dry-as-a-bone financial filings, double-speak, generalities, boilerplate, and jargon...
It can be, and often is, dull.
But boy, this week was fun.
Honestly, it's the most fun I've had watching the market in a long, long time.
You know why.
You probably laughed too.
How could you not laugh at GameStop-gate, the greatest Wall Street own since Billy Valentine and Louis Winthorpe III took down Duke & Duke?
Surely by now you're familiar with the details, but as a writer, I'm required by law to recap them. So if you couldn't be bothered to follow the news this week (no judgment), here's what happened...
A group of amateur (re: retail) investors noticed that Wall Street hedge funds had lined up to short GameStop Corp. (NYSE: GME) through the crust of the Earth.
That is, they'd borrowed and sold 71.2 million shares of the stock, which actually exceeded the total number of GameStop shares in existence (69.7 million). That amount of short interest isn't unprecedented, but it's rare.
So one enterprising individual took that information to a relatively small online community and suggested fellow investors start buying in. If enough investors followed suit, they could bid up the price of the stock, forcing the short sellers to buy shares to cover their bet.
This would create a chain reaction in which the price of the stock would rise even further, forcing still more short sellers to cover their bets, and so on and so forth.
And that's exactly what happened.
Up and down Wall Street, hedge funds were effectively forced to buy shares at a loss to compensate for the shares they'd borrowed and sold. As the momentum built, GameStop stock surged from less than $20 per share to more than $400.
Basically, it turned the traditional Wall Street model upside down: Retail investors lined their pockets with hedge fund money instead of the inverse.
It was glorious. It was the MIT blackjack team taking the house.
And make no mistake, that's exactly what Wall Street is.
If stock trading is gambling, Wall Street is the house. It's Terry Benedict in Ocean's Eleven.
It's built to win at the expense of the average investor, while giving you the illusion that, with a little luck, you'll be made a millionaire overnight.
The Wall Street elite have access to advanced algorithms that conduct automated trades in milliseconds, they have computers on the very floor of the stock exchange, they have insider connections and information, and they have perhaps the most important edge of all: other people's money.
Stock trading isn't a game to them; it's business.
And when it all goes wrong, when all their tricks fail them, when they get caught red-handed breaking the law and manipulating the market...
They get bailed out by the government, by each other, or by some combination of the two, because they're pretty much one and the same.
They get all of the rewards but none of the risk and little, if any, accountability.
So yeah, it's pretty great to see the tables get turned for a change.
But you know they won't stand for it.
This is America. Only the elites are allowed to game the system. Not the poors. Not the peasants.
No, that can't be allowed.
So now they're all rushing to stop the bleeding and ensure that this kind of thing never happens again.
Two of the largest brokerages in the country, TD Ameritrade and Charles Schwab, took the ultra-unusual step of restricting trades of GameStop along with other stocks that the Reddit retail investors were targeting. Schwab, which owns TD Ameritrade but lets it operate independently, also changed its margin requirements to limit the amount investors could borrow.
Wells Fargo has banned its advisers from making stock recommendations on the stocks in question.
Even Robinhood, the trading platform that enabled many of these trades, has blocked new purchases of GameStop, and AMC and is only allowing stockholders to sell.
Nasdaq CEO Adena Friedman told CNBC Thursday her firm actively monitors social media chatter and will halt stock trading if the content it sees matches with “unusual activity in stocks.”
And William Galvin, Massachusetts’ secretary of the commonwealth, told Barron’s that these "unsophisticated investors" — many of whom made life-changing gains while hosing Wall Street billionaires — needed to be stopped for their own good.
In fact, Galvin says the New York Stock Exchange should take the drastic step of halting trading in GameStop stock for 30 days so it can “cool down.”
“I really think at this point it calls upon the regulators, in this case, the New York Stock Exchange, to consider simply suspending it for a month and stop trading it,” Galvin says. “These small and unsophisticated investors are probably going to get hurt by this.”
It's even gotten out to the Biden administration, which is "monitoring the situation," White House press secretary Jen Psaki said.
Meanwhile, Citadel LLC and Point72 Asset Management have rushed in with $2.75 billion to bail out Melvin Capital Management — a firm that was heavy into GameStop shorts and has since lost 30% of the $12.5 billion it started the year with.
Melvin is run by Gabe Plotkin, who last year bought a $32 million mansion in Miami, the $12 million house next door, and a "large chunk" of the Charlotte Hornets in 2019. And Point72 is run by Steve Cohen, who ran SAC Capital, which was shut down after pleading guilty to insider trading and paying a $1.8 billion fine.
So the message here is clear: "We burn you. You don't burn us."
Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page.
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