The People vs Wall Street: Robinhood & Populism 2.0

“We can remain irrational longer than you can remain solvent.”

As markets in the US fell by around 2% since Monday, their worst week by far this year, this rallying cry could be heard all across the internet. While for some, the run on Wall Street was an exercise in making serious gains on small investments, for others it was about sending a message to what they perceived as the financial elite that rules over them.

The chaos began when online investors on Reddit’s subsection r/wallstreetbets and 4chan’s /biz/ board spotted what appeared to be a massive strategic error on the part of a few major players on Wall Street shorting Gamestop shares. This error would turn out to be catastrophic.

Gamestop, as a retailer, had been in decline long before the Covid-19 pandemic put the company into serious jeopardy. Expecting this trend of rapid decline to continue, perhaps to the point of complete collapse, a number of investment firms decided to massively short the stock.

A short is when you borrow something in order to sell it, under the premise that the thing you’re borrowing will devalue, so that when it comes time for you to give the borrowed thing back, it is worth less than what you paid for it.

For example, let’s say I borrowed my friend’s brand new Playstation 5 for a month. However, instead of simply playing the console, I sell it for €700, as since the console is in short supply and high demand right now, and so sells for a premium. Then, a month later, with the supply of the console now stable, and demand lowered, I can pick up a new PS5 for €500. I then give that console to my friend, and pocket the €200 profit.

Through shorting, one can effectively bet against a company or market in order to make money. Firms such as Scion Asset Management used shorting to make billions off of the American Housing market during the 2008 Financial Crash. Likewise, hedge funds like Melvin Capital and individual investors such as Andrew Left wanted to achieve similar results with Gamestop. Borrow their shares, sell them off, only to buy them back later at a much lower price.

However, there is one major issue with shorting, and that is while you can theoretically double your initial investment if the borrowed asset’s value drops to zero, you also expose yourself to potentially infinite loss. Say that, instead of the PS5 I borrowed lowering in value by the time it came for me to give it back, it actually quintupled to $3500. As I would still be on the hook for the console, I would be forced to pay that premium, and, by extension, eat the loss. In principle, there is no limit on how high the price can increase, but no matter what, I am required to pay it in order to return the device to my friend.

This is exactly what occurred for those unfortunate enough to have shorted Gamestop. With the news that Gamestop had more shorts than shares on the market, small-time investors got to work buying up as much Gamestop stock as they could, and prices began to rise. What was a $20 stock at the start of the January ended trading on Wednesday over $300.

Short sellers very quickly began to suffer. Melvin Capital shrank 30%, requiring a bailout to the tune of $2.8 billion in order to stay afloat, and Andrew Left’s publication Citron Research has since announced that it will no longer publish reports on shorting, and will instead focusing on other forms of investment.

The massive growth of Gamestop stock price was only halted on Thursday when Robinhood, the main broker being used by retail investors involved in the run, declared that they would no longer allow individuals to purchase Gamestop shares, citing extreme market volatility. However, with the resumption of limited trading on the app on Friday, the price has since mostly recovered to Wednesday levels.

There is little doubt in the mind of career investors that this is a bubble. While Gamestop stock was perhaps initially undervalued when many firms opened their shorts, it’s market cap has overtaken that of many Fortune 500 companies, despite it remaining seriously financially challenged. It is only a matter of time before stock price crashes, which will leave many retail investors with serious losses.

Despite this inevitable crash on the horizon though, online investors remain adamant that they will not sell their shares. While initially about the profit, there is a serious sense online that this chaos is not about the money anymore. As other heavily shorted stocks, such as AMC cinemas and Nokia also spiked, there is an increasing political streak bubbling to the surface. Not selling your shares is no longer merely a way of ensuring the price stays high, but a moral imperative stemming from perceived injustice.

In this way, the current chaos in the stock market is like Occupy Wall Street meets MAGA Republicanism. Those flinging money at the cause do so not because they want to see a return, but because they see it as a way to weaponise the market against big league investors. This movement, which has united disparate groups as far to the right as those resident on 4chan, and to the left as those on Twitter, has long since stopped being about money. It’s about political power. Quite frankly, it’s about screwing over big finance.

This sense of ideological outrage motivating people to not sell their shares was only bolstered by the actions of companies such as Robinhood. Many brokers claim that they stopped people from buying more shares since the companies themselves couldn’t afford it, as delays in payment processing meant they were operating on credit they didn’t have. However, accusations flew that the likes of Robinhood were simply trying to protect short sellers they had close connections with, a sentiment only inflamed by the restrictions tanking prices on the affected securities, as well as reports that Robinhood was forcing sales on some accounts, resulting in major losses for some pundits. Either way, many in the retail market have a great deal of hatred for what they see as major financial institutions, and that anger is only growing.

What we’re witnessing here is quite possibly the birth of Populism 2.0. While previous tactics used by those who feel alienated from the establishment have been limited to rioting, street protests, and online posting, radicals have now found a far more effective way of hurting elites. Instead of burning down small businesses, or pointlessly posting on social media, they can simply hit the establishment where it really hurts — their pockets.

However, while I do believe that what we are witnessing is a major paradigm shift, both politically and financially, there remains whispers that the Gamestop surge is not being driven by Reddit and friends at all. Claims have been made that it is in fact other Wall Street entities driving the chaos in the desire to chase major profits, and perhaps even to put the competition out of business. While I personally am yet unsure of these claims, it is certain that a number of Wall Street players have made billions of dollars from growth in Gamestop and related stocks, just as others have lost billions. One must always be aware that their political activism may actually be a front for amoral, or even nefarious, actors.

While the Gamestop fiasco has already seen the downfall of a number of major players on Wall Street, it is still very much a developing story. Though it is possible that the Gamestop bubble pops when markets open again on Monday, there is also a chance that the chaos will keep on growing for weeks, perhaps even months, and the longer it goes on, the greater the fallout will be when everything begins to fall apart.