27 February, 2021

They Don't Really Believe in the "Free Market!"

It might be assumed that those who believe in the "free market" would be happy and supportive when people engage in that market. You might think this would especially be the case when average people engaging in the market are successful and look like they are going to make a lot of money. After all, isn’t one of the claims in defense of capitalism that anyone can succeed and that it is supposedly the first economic system that allowed people to improve their state in life? Recent events make it clear this is not the case, at least not for those who are already “big players” in the market and who wield significant economic, and therefore political, power.

Of course, I am referring to the GameStop investment strategy of the members of a Reddit group called WallStreetBets. This article will not delve into the question of the GameStop investment itself, but give a general sense of the situation and the people involved. WallStreetBets is not an actual investment group, like financial institutions or hedge funds. It is a forum primarily consisting of ordinary citizens who are sharing their opinions about potential investments in the stock market. Reports I have read about the group indicate that members understand that none of them are actually acting as financial advisors in any professional sense. They are just sharing and debating their reasons for their stated opinions about potential investments. Now, most capitalists I know would have no problem with this. Whether or not GameStop was or was not a good investment isn’t really the issue because the general motto of the stock market is “let the buyer beware.” It is, after all, essentially a huge gambling casino. You place your bets and you might win or lose.

A member of the WallStreetBets group named Keith Gill was carefully examining GameStop’s position in the stock market and the company itself. While the conventional “wisdom” of the market “experts” was that GameStop was a company on its inevitable way to failure, Mr. Gill disagreed. He felt that, not only was the prediction of the company’s demise premature, but that GameStop still had both time and the resources to adjust its business to keep going for a good while. He saw that hedge fund investment groups were “short selling” GameStop far beyond what was reasonable even if the company was in trouble, resulting in the stock price being artificially low. He shared and defended his position to the Reddit group, and many members became convinced that he was correct. Acting individually, the members began buying GameStop stock as fast as they could. You might think this would not have much impact, but WallStreetBets had a huge number of members and the number of purchases they made resulted in raising the price of the stock at what was considered an unbelievable rate.

On the other side of this equation were the hedge funds. Now, to participate in a hedge fund, you have to already be wealthy. A hedge fund is essentially a pool of money contributed by wealthy people who allow the managers to invest on their behalf. The hedge funds involved had bet heavily on GameStop’s failure through a market practice called a short sale. Short selling involves borrowing a stock today with a promise to return it later. This transaction only involves the stock itself regardless of the price. The hedge funds, believing the value of a given stock will drop, borrow large amounts of shares of that stock so they can sell it at the current price. Of course, this large scale selling of a given stock will result in the price going down. In other words, they are not merely “betting” that the value will go down, they are actively engaged in driving that value down. It is generally known that they will also go on financial talk shows and write articles defending their position that the value will drop, which is likely to result in members of that audience who own the stock selling their shares, driving the value even further down. When the stock is due, the hedge funds must buy the stocks back at whatever the new current price is. If the price is less than when they sold it, they make a profit. However, if the price is more, they lose, Since the price can go up much farther than it can go down, the potential for loss is much higher.

So there is the situation. The hedge fund investors wanted the value of GameStop to decrease and the WallStreetBets group wanted the value to increase. The WallStreetBets group was winning and winning big. The value of GameStop stocks were skyrocketing, and it was all according to the established rules of the market. Anyone could buy or sell the stock as they chose as long as they followed the rules. It looks like the average people were going to win; until they were prevented from freely participating in the market.

As financial news reports were accusing the WallStreetBets group of essentially being insurrectionists, and accusing them of being no better than those who had rioted in the U.S. Capitol on the day the electoral vote was officially being counted, the company whose app was primarily being used by the WallStreetBets group prevented all transactions of GameStop and several other companies in which the group had heavily invested. A day or two later, the app was updated again so they could sell, but not buy, shares in those companies. In other words, the app would only allow activity that would result in the price going down – like the hedge fund investors wanted. Now, you can only sell a stock if someone can buy it, so this group was prevented from buying while others participating in the stock market were still allowed to.

In other words, the WallStreetBets group were not allowed to participate in what the Wall Street insiders would argue is the greatest example of the free market in the world today. The same changes were made on other personal investment apps, revealing that this was a coordinated effort to force a particular change to the market that would be advantageous to wealthy insiders on Wall Street and would disadvantage average people trying to participate in the market. This is the important fact of this incident. It doesn’t matter if GameStop or the other companies were actually good investments. These people were following all of the established rules of the market. They had entered the casino and all placed their bets. Because they were winning, the casino chose to shut them down.

There are investigations going on about what happened. Mr. Gill even had to testify before the U.S. House of Representatives. Because of the financial (and therefore political) power of those involved “behind the scenes,” and the willingness of the media to back their side, I think it is unlikely that the real perpetrators will have any significant negative consequence to their actions. Instead, the common citizens in the WallStreetBets group are being vilified and essentially treated like criminals when they did nothing illegal.

If you want to check for further information on this incident, I have included several resources below.

VivaFrei: From GameStop to Robinhood class action lawsuit?
Forbes Breaking News: Gamestop Investor Keith Gill’s testimony to Congress

CNBC: Jim Cramer: Reddit’s ‘WallStreetBets’ is targeting short position

Fox Business: Payne sounds off on Wall St over GameStop: All of this whining is making me sick

MarketWatch: GameStop and AMC trading restricted by TD Ameritrade, Schwab, Robinhood, others

Tim Pool: Wall Street in panic mode, trading on GameStop and AMC halted as plebs NUKE elite’s hedge funds

Tim Pool: Robinhood bans stock buying for Gamestop and others, media cronies smearing WSB as Alt-Right
Daily Caller: Class action lawsuit against Robinhood

Newsweek: Robinhood app blocks GME stock trading, is flooded with 1-star reviews

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