Checkpoint: The House Always Wins, Why "Gamestonks" Was A Scam
GameStop / Kotaku
“Gamestonks” or the Gamestop Stock short squeeze has come and passed with winners who bought low heading to the bank and losers who bought during the peak wondering why they invested in this media circus. After the stock skyrocketed to over $300 a share, the price of a share now sits at a daily average of just over 50$ - a number closer to the stock’s pre-squeeze price of $15 - $40 dollars a share. Despite the narrative focus on the retail investors who rallied together to skyrocket the value of Gametop shares, after the water has receded hedge funds still hold the majority of the capital traded through Gamestop’s stocks, with hedge fund Senvest Management netting a tidy $700 million profit. While some number of retail investors certainly achieved an exciting payday last month, the scale of money which flowed towards hedge funds still remains staggering in comparison. With some distance, it seems as though the question of scale is the element that the media narrative failed to highlight throughout the coverage of the January frenzy, failing to ask questions such as: Is it even possible for an organized group of retail investors to rival the capital committed by Melvin Capital in the original short?
The Gamestop Stock drama began when a group of Redditors from r/WallStreetBets noticed that a collection of hedge funds including Melvin Capital had short sold on a collection of companies including GameStop for amounts of shares that were greater than the total shares available. Functionally, this meant that these companies had bet on the continued decline of these companies and borrowed shares of Gamestop so that they could quickly sell these shorted stocks and rebuy them at a lower price, essentially pocketing the difference by which the company had depreciated in value through this process. The reaction from the plucky retail investors was to begin investing in Gamestop stock in what is called a short squeeze, to cause a surge in prices, increasing the value of the stock and forcing the hedge funds to eat the cost of the now vastly more valuable Gamestop stock.
The media narrative surrounding this wall-street twist was understandably ecstatic. A group of individuals had rivaled the power of Wall Street with their own wallets and forced themselves into an industry that has become increasingly exclusive as hedge-funds and traders accumulate unimpeachable amounts of capital. Overnight financial news guests and hedge fund representatives decried the dangers of the situation - outraged that the unwashed masses had broken into their casino, Chris Cuomo lambasted the owner of Robinhood - a retail trading app that makes its profits through selling the data of the individual traders who use their app, and left-wing youtube shows and podcasts excitedly noted that the people had finally found a way to compete with Wallstreet through direct buying power. The most notable of these media moments came after the Robinhood app restricted the buying of the Gamestop stock while still allowing it to be sold, a move that would inevitably drive down the price of the stock and ultimately clot the hemorrhage of money from funds like Melvin Capital.
When Chris Cuomo sat down with Robinhood CEO Vlad Tenev he lambasted the terminally unlikeable CEO, stopping only short of accusing him of manipulating the market to protect his company’s investors, a list which included Melvin Capital itself.
What this media circus failed to recognize is that the practice of freezing the sale of an extremely volatile stock, with Gamestop at that moment being wildly volatile, is an industry-standard and often even required by market regulatory forces. While the blood was draining from Vlad Tenev’s face on Chris Cuomo’s show, it was not because he’d been caught in a legal bind. Instead, it seems he was just stunned to be facing criticism for the manipulative, opaque, and naturally anti-retail-investment practices that are the common state of affairs on Wall Street. While limiting the sale of a volatile stock is neither illegal nor even immoral, the optics for the company were devastating.
As the trading week came to a close, the value of Gamestop shares stabilized, higher than before the short-squeeze, but still hundreds of dollars below the week’s peak. In the end, it was not the retail investors so lionized by the media that walked away with a majority of profits from the wild week on Wall Street. Instead, it was other hedge funds, such as Senvest Management that had either moved first on the short-squeeze or reacted to the meme-trend in an effort to cannibalize a large portion of the value from the companies that had originally shorted the stock. For retail investors, who don’t have the capital to insulate these risky investments and debatably even own enough to trigger the skyrocketing value witnessed in the short-squeeze, it was a mixed and familiar picture. Those who got in early made profits, those who arrived late to the party saw only losses from the bounce. It seems now that in the excitement of highlighting a standoff against Wall Street, the majority of pundits failed to ask whether Wall Street itself had triggered or accelerated the spike in value. Although Melvin Capital was decimated, other Wall Street hedge funds walked away with the majority of profits.
Today r/WallStreetBets is in a free fall as a forum, as both forum mods and investors try and limit losses by convincing their compatriots to remain committed to a second rally that will probably never come. Some Redditors definitely walked out of the room richer, but as a sustainable movement against Wall Street, the Reddit vanguard has completely collapsed - primarily due to the stress that this sort of gambling and investment can put on any group that does not have literal billions of dollars insulating them from risk. Today the leaders on r/WallStreetBets stand a greater chance of facing investigation for securities fraud (lying about the value of a stock) or market manipulation than do either Robinhood or the main hedge fund players.
In short, the house won again. While the narrative of a popular standoff against hedge funds was an exciting bit of television, the event was not a people’s movement against Wall Street or even a roadmap for effective proletarian action against capital holders. Even historic moments such as the inevitably disappointing Occupy Wallstreet protests offer us a more cohesive vision, as the protests at the very least did not open a window for hedge-fund cannibalism and the enrichment of yet another shadowy group of investors over another. It is still possible that movements of retail investors can directly impact the functions of Wall Street if well organized, but the “meme” investment strategy enacted by r/WallStreetBets turned out to be more rats on a sinking ship and less a group of brave pioneers firing the first warning shots against the financial elite.
