- Reddit day traders tried to beat Wall Street at their own game to prove that the system is rigged.
- Instead, brokers blocked them and their stakes plummeted, while some hedge funds still made a lot.
- Experts said Wall Street’s reaction showed how far the cards are against retail investors.
- Visit the Insider Business section for more stories.
Keith Gill, the day trader and member of the Reddit group WallStreetBets, which is widely credited for triggering the recent GameStop commercial frenzy, said in late January that he had turned his $ 54,000 investment into a $ 48 million fortune.
Days later, it was split in more than half, to $ 22 million, and regulators turned their eyes to Gill, investigating him for possible disclosure violations.
Many retail investors did far worse. A Robinhood user lost $ 70,000 in savings and thought about committing suicide. Another, Alexander Kearns, did.
GameStop’s stock, which peaked at more than $ 480, fell to around $ 52 on Friday.
Before the roller coaster got off track, however, a hedge fund came out with a profit of $ 700 million, the brokerage app Robinhood raised billions in new financing after being forced to restrict its users from buying shares, and the trading giant Citadel probably earned a good deal as market volatility increased.
Although the dust is far from settling and some Wall Street companies have lost a lot, David’s victory against Goliath now hardly seems the most likely outcome.
He had also created a compelling narrative: an army of retail investors – without deep pockets, sophisticated trading algorithms, proprietary market data or other trading tools – coming together to defeat powerful and corrupt financial institutions at their own game.
Ultimately, however, Wall Street and other big investors still seem to have been at the top, and experts, at least those outside the industry, say it is this result that further proves how the system is manipulated.
Insider spoke with three financial market experts – none of whom work for traditional financial services companies. They said there was a lot of work to be done to make markets work for small investors again and, just as important, to restore public faith that markets can do just that.
“Aimed at favoring the great”
“The whole business is basically a dynamic of power … it is aimed at favoring the big ones over the small ones,” Garphil Julien, an associate researcher at the Open Markets Institute antimonopoly research institute, told Insider. “Those with huge amounts of capital, huge amounts of money, will use their power basically to get what they want and when they get what they want, someone else will lose,” he said.
He is not alone in this assessment.
According to a recent CNBC poll, a record 57% of Americans see the stock market as a reflection of just how companies and the wealthy are doing, not the rest of the country. This is also true among financial elites and Republicans, both of whom are historic defenders of free markets.
“Is the market really fair for individual investors? Is it really competitive? What we are seeing is that it is not,” said Julien.
As former Wall Street analyst Alexis Goldstein recently put it in an opinion piece for The New York Times: “Wall Street’s advantage over retailers remains, as always, structural,” and even if a group of Redditors come together, “the house still wins.” But, she argued, “instead of betting on the dubious promise of more Americans gaining access to the casino, it’s time to rewrite the rules to ensure that the house doesn’t always win.”
Julien said that this means adding more consumer protection, as well as repressing the monopolization of various segments of the financial services industry. For example, he pointed to brokerage applications, such as the E * TRADE owned by Morgan Stanley and TD Ameritrade, which is owned by Charles Schwab.
Make money “making money”
Another problem underlying the GameStop saga is that many Wall Street companies have entered into businesses that are inherently designed to extract as much money as possible from the financial system for their own gain, rather than helping to allocate it to uses that would help the economy at large. .
In the midst of last month’s trade frenzy, markets have proved quite resilient, but that does not mean they are working to protect smaller investors who have more to lose.
“There will be a temptation to say … the market is not broken, everything is fine,” Barbara Roper, director of investor protection for the Consumer Federation of America, told Insider. “While it is true that the market is not broken – yet – I don’t think it means that everything is fine.”
Roper said it is good to focus on improving transparency and accountability in relation to practices that may involve conflicts of interest, such as payment by order flow, which Robinhood and Citadel are facing scrutiny, but that the issue is also very more fundamental and generalized.
Read More: Robinhood earns hundreds of millions by selling customer orders. This business model is about to come into focus.
“The financial services industry itself has divorced itself from the more tedious and less profitable work of helping to direct capital to its best uses in supporting the productive economy and, for some time, has earned most of its money by making money,” Roper said.
“Financial companies earn all their money by securitizing everything under the sun,” she said. “They have found a way to be really profitable and are therefore chasing profits, even though the niche is crowded.”
But that problem “was at the heart of the last financial crisis, and we haven’t solved it there,” said Roper, referring to the 2008 financial crisis.
Since then, there have been several near-crises and the problems have only worsened.
Robinhood himself was criticized – and fined $ 65 million by the Securities and Exchange Commission – for high-frequency trading, a controversial practice that uses powerful software to execute big trades in fractions of a second, allowing companies to make money from momentary changes in the stock price. Wall Street banks are even avoiding regulations on derivative trading – the same risky behavior that precipitated the 2008 crisis – according to the financial blog Wall Street On Parade.
Roper said he also doesn’t see dangerous Wall Street business models being dealt with anytime soon.
“If we didn’t do it when Wall Street literally brought the global economy to the brink of collapse, I don’t think we’ll do it now because some people on Reddit pushed and caused some chaos in the markets for a few weeks,” she said. “I think I’m just as cynical as the people at WallStreetBets.”
“Broader public outrage”
Part of Americans’ frustration with the current financial system is that it has become so complex that only Wall Street insiders really seem to know how it all works, something the industry uses to its advantage to avoid blame in situations like GameStop.
“It’s another episode similar to the previous ones, where the public feels that there are a lot of things wrong here – I don’t know exactly what’s wrong, but I just feel like something isn’t working,” Graham Steele, senior member of the American Economic Freedom Project, said the Insider.
“It is just a general popular feeling that a system in which this type of scenario can happen, fundamentally does not work for the public and is ‘defrauded’ or whatever, but they know something is wrong.”
Steele also said that the increase in inequality, the failure to respond to the pandemic and the polarization around the election amplified GameStop’s fury: “It looks like you are putting a new financial episode on top of another broader public outrage.”
This is also apparent in voices from across the political spectrum that have criticized Wall Street in recent weeks: progressive Democrats like Congresswoman Alexandria Ocasio-Cortez and Senator Elizabeth Warren; far-right Republicans like Senator Ted Cruz; and technology investors like Elon Musk and Mark Cuban.
But that’s where their deal ends, with Democrats generally favoring government intervention and Republicans generally pushing for more transparency and then letting the markets decide the rest.
“In terms of Silicon Valley people,” said Steele, they “portray themselves as populists, but many of them have their own financial interests at stake here. Many of their solutions are like, not to use this app, use the app that I invested in. “
“I just don’t see Elizabeth Warren going around pumping someone else’s trading app because a venture capitalist said, ‘This is the right thing to do,'” he added.
Elon Musk, for example, has spent the past few weeks promoting cryptocurrencies like Dogecoin.
Ultimately, the three experts agreed that making markets fairer and more aligned with the health of the economy in general will require reforms that go far beyond the financial services sector.
“Fixing this system requires a series of policy solutions ranging from financial regulation to tax policy, how we structure the retirement system and how we provide health care to people,” said Steele.
Read More: The SEC is monitoring GameStop’s trading frenzy. That is why lawyers and former regulators say it will be difficult to restrict the market.