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- Reddit day traders have tried to beat Wall Street at its own game to prove the system is rigged.
- Instead, brokerage firms locked them in and their holdings plummeted, while some hedge funds still won big.
- Pundits said Wall Street’s reaction showed how the game was against small investors.
- Visit Insider’s Business section for more stories.
Keith Gill, the day trader and member of Reddit WallStreetBets who is widely credited with sparking the recent GameStop trading frenzy, claimed in late January that he had turned his $ 54,000 investment into a fortune of $ 48 million.
Days later, it had been cut by more than half to $ 22 million, and regulators had set their sights on Gill, investigating potential disclosure violations.
Many retail investors have done much worse. A Robinhood user lost $ 70,000 in savings and considered suicide. Another, Alexander Kearns, did.
GameStop’s stock, which peaked at over $ 480, fell to around $ 52 on Friday.
Before the roller coaster went off the rails, however, a hedge fund walked away with a profit of $ 700 million, the brokerage app Robinhood raised billions in new funding after being forced to restrict its users from buying stocks, and trading giant Citadel likely made a big sum of the increased market volatility.
While the dust is far from settled and some Wall Street companies have lost big, a David victory over Goliath no longer appears to be the most likely outcome.
It also created a compelling narrative: an army of retail investors – without deep pockets, sophisticated trading algorithms, proprietary market data, or other tools of the trade – banding together to beat powerful and corrupt financial institutions to their own. own game.
Ultimately though, Wall Street and other big investors always seem to have finished first, and pundits, at least those outside of the industry, say it’s this result that further proves how the system is. rigged.
Insider spoke to three financial market experts – none of whom work at traditional financial services companies. They said there was a lot of work to be done to make markets work again for small investors and, just as important, to restore public confidence that markets can do just that.
“Designed to favor adults”
“The whole business is essentially a power dynamic … it’s meant to favor the big over the small,” Garphil Julien, a research associate at the anti-monopoly think tank Open Markets Institute, told Insider. “Those who have huge amounts of capital, huge sums of money, will use their power to basically get what they want, and when they get what they want, someone else is going to lose,” did he declare.
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 only of how businesses and the wealthy are doing, not the rest of the country. This is also true among financial elites and Republicans, both historical defenders of free markets.
“Is the market really fair for individual investors? Is it really competitive? What we are finding is that it is not,” said Julien.
As former Wall Street analyst Alexis Goldstein recently said in a New York Times op-ed: “Wall Street’s advantage over retail traders remains, as always, structural,” and even though a group of Redditors regroup, “house wins.” But, she argued, “rather than play on the questionable promise of more Americans having casino access, it’s time to rewrite the rules to make sure the house doesn’t always win. “
Julien said this meant adding more protections for consumers, as well as cracking down on monopolization of various segments of the financial services industry. For example, he mentioned brokerage apps, such as E * TRADE, owned by Morgan Stanley, and TD Ameritrade, which is owned by Charles Schwab.
Make money by “making money”
Another problem underlying the GameStop saga is that too many Wall Street companies have ventured into ventures that are inherently designed to extract as much money as possible from the financial system for their own profit, rather than helping. to use it for uses that would help the economy as a whole. .
In the midst of last month’s trading frenzy, the markets have finally proven quite resilient, but that doesn’t mean they are working in a way that protects smaller investors who have more to lose.
“There will be a temptation to say … the market is not broken, all is well,” Barbara Roper, director of investor protection at the Consumer Federation of America, told Insider. “While it’s true that the market isn’t broken – yet – I don’t think it follows that all is well.”
Roper said it was good to focus on improving transparency and accountability regarding practices that may involve conflicts of interest, such as payment of the order flow, on which Robinhood and Citadel are both. under scrutiny, but that the problem is also much more fundamental and widespread.
Read more: Robinhood earns hundreds of millions selling customer orders. This business model is about to materialize.
“The financial services sector itself has sort of separated itself from the more boring and less profitable work of helping to direct capital to its best uses to support the productive economy, and for some time now it has drawn most of his money to make money, “Roper says.
“Financial companies make all their money securitizing everything under the sun,” she said. “They’ve found a really profitable way, so they’re looking for the profits even if the niche is crowded.”
But this problem “was at the heart of the last financial crisis, and we did not solve it there,” Roper said, referring to the 2008 financial crisis.
Since then, there have been multiple near crises and the problems have only worsened.
Robinhood himself has been criticized – and fined $ 65 million by the Securities and Exchange Commission – for high-frequency trading, a controversial practice that uses powerful software to execute large trades in fractions of a second. , allowing companies to make money through momentary changes in the price of inventory. According to the financial blog Wall Street On Parade, Wall Street banks are even evading derivatives trading regulations – the same risky behavior that precipitated the 2008 crisis.
Roper said she also doesn’t see Wall Street’s dangerous business models being discussed 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’re going to do it now because some people on Reddit put on a short squeeze and provoked chaos. markets for a few weeks, “she said.” I guess I’m as cynical as the folks at WallStreetBets. “
“Wider public outrage”
Part of Americans’ frustration with the current financial system is that it has become so complex that only Wall Street insiders seem to really know how it all works, which the industry uses to its advantage to dodge. blame it in situations like GameStop.
“This is another episode similar to these previous ones from the audience feeling like there are several things wrong here – I don’t really know what’s wrong, but I just feel like that something isn’t working, ”Graham Steele, senior fellow at the American Economic Liberties Project, told Insider.
“It’s just a general popular feeling that a system in which this kind of scenario can come true just basically doesn’t work for the public and it’s ‘rigged’, or whatever, but they know something’s wrong. do not go.”
Steele also said that widening inequalities, failed pandemic response and polarization around the election have amplified GameStop’s fury: “It feels like superimposing a new financial episode on top of another public outrage. wider. “
It’s also evident in voices from all walks of life that have criticized Wall Street in recent weeks: progressive Democrats like Representative Alexandria Ocasio-Cortez and Senator Elizabeth Warren; far-right Republicans like Senator Ted Cruz; and tech 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, then letting the markets determine the rest.
“As for the people of Silicon Valley,” Steele said, they “paint themselves as populists, but a lot of them have their own financial interests at stake here. A lot of their solutions are like, don’t not use this app, use the app i invested in. “
“I just don’t see Elizabeth Warren pumping up someone else’s trading app because a venture capitalist said, ‘it’s the right thing to do,'” he added.
Elon Musk, for example, has spent the last few weeks developing cryptocurrencies like Dogecoin.
Ultimately, the three experts agreed that making markets fairer and aligned with the health of the economy as a whole would require reforms that go far beyond the financial services sector.
“Fixing this system requires a whole host of policy solutions ranging from financial regulation and tax policy to how we structure the pension system and how we provide health care to people,” said Steele.
Read more: The SEC is monitoring the GameStop trading frenzy. Here’s why lawyers and former regulators say cracking down on the market will be tough.
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