Roar writer Sam Pennifold on the recent GameStop stock market scandal and how it has demonstrated the ability of day traders to affect the global financial scene.
The idea of day trading is a relatively new financial phenomenon whereby everyday people can become investment bankers and run the gauntlet that is the stock market. It is both liberating and a potential financial disaster in the making.Â
Apps such as Robinhood allow everyday people to access the stock market, which until recently has been shrouded in mystery and complicated pretence. While most people take ridiculous positions and lose money, this is a boom or bust game, and when you win, you win big. In the past month, day traders have become a financial force to be reckoned with. Wall Street and the world are noticing.
GameStop, a gaming retailer in the US whose stock prices have dipped in recent years, has seen the value of its shares skyrocket by more than 1700% after members of the popular subreddit r/WallStreetBets collectively chose to buy stock en masse. The company’s shares were valued at $2 each a month ago – they are now trading at over $300 a share.Â
This is called a “short squeeze”. The financial world is full of confusing terms designed to keep everyday people out of the market, but to explain simply, “shorting” is when someone essentially borrows shares in the belief that their value will fall in order to buy them back later, pocketing the difference in price as profit. It is a quick but risky way to make money on the stock market. Hundreds of hedge funds and bankers decided to take a short position on GameStop shares, a company not expected to be profitable again until 2023, and had huge financial positions relying on that stock falling.
Members of the subreddit r/WallStreetBets saw how over-shorted the stock was, and took the opportunity to “squeeze” the investment banks and hedge funds’ position by buying the stock in massive proportions. The stock market works on a simple supply and demand model. GameStop stock wasn’t in great demand – its value was low and falling – but once the day traders from r/WallStreetBets started buying up the stock, its value skyrocketed. This forces those shorting the stock to buy the shares they had borrowed at a higher value, incurring massive losses for them, and massive gains for those with a “long” position, or those who own the stock outright.
Day traders, then, have essentially committed daylight robbery against hedge funds and investment banks – and made a lot of money doing it. The three largest shareholders in GameStop have seen their collective net worth rise by more than £2 billion in the last month.
Financial regulators in the US are now starting to question the legality of these practices with allegations of “market manipulation”, mostly peddled by hedge funds and investment bankers circulating. Discord has now banned the WallStreetBets server from their platform, though they have stated this was due to the breaking of community guidelines surrounding offensive speech rather than perceived financial crimes. The original subreddit, r/WallStreetBets, was also temporarily made private by its administrators due to a massive influx of new users.
It is hard to feel sorry for investment bankers at a time like this. The idea of manipulating the market is a legal and moral grey area, and allegations of doing so are often laid at feet of the very same bankers looking to place blame for their poor positions now.Â
Investment bankers have time and time again been partially responsible for economic crashes. The 2008 financial crash is only the most recent example, with millions of people having lost their hard-earned money whilst large banks that were too big to fail received huge, no-strings-attached bailouts.
It is liberating, then, to see everyday people beat the big banks at their own game – but day traders are not modern-day Robin Hoods giving to the poor. They are just taking advantage of the same rickety system big banks utilise and, in the end, taking money from people who have earned it when banks lose. The only difference is day traders do it from their parents’ couches, and bankers do it from their offices.Â
