No heroes or villains on Wall Street

The GameStop saga has fired the imagination of people, even those who are ordinarily not interested in the business of stocks and bonds. The poetic justice of entitled Wall Street Hedge Fund managers who were shorting a stock and were brought to their knees by a rag-tag army of day traders frequenting the Reddit sub-forum WallStreetBets who decided to drive the stock sky high is hard to miss. To many commentators, this is Occupy Wall Street 2.0 — a move to teach the greedy rich elite who have been rigging the game forever a lesson they will not forget.

As the popular recounting goes, the villains of the GameStop saga are the greedy hedge fund managers who were shorting the stock of the company in the hopes of making huge profits. Primary among them are Gabe Plotkin, founder of Melvin Capital and Andrew Left, founder and executive editor of Citron Research that publishes reports on companies the firm considers over-valued or engaged in fraudulent activities. Both Mr Plotkin and Mr Left had big short positions in GameStop, expecting to drive down the stock price and make big profits. The others making the list are the other hedge fund stars who came to Mr Plotkin’s aid. 

Mr Plotkin and Mr Left had to close out their short positions at a huge loss after losing billions. But even the other hedge funds that have tried to rescue them have seen losses.

The other set of bad guys, according to this version of the tale, are the regulators who have done nothing to stop the hedge funds from preying on small, retail investors and routinely making millions of dollars of profits, while the small investor either ekes out small gains or loses money.

The heroes in the tale are less easy to identify though. GameStop, the company whose stock was the trigger of this fight, is hardly a sterling business. The retailer of video game consoles and games primarily had clearly missed the online retailing bus. It is deep in debt and, during the Covid-induced lockdown, had to close the majority of its physical outlets. Whether the business can survive is far from clear despite its recent stock surge. Analysts had stopped covering it some time ago when it started shuttering hundreds of outlets.

The day traders of the Reddit sub-forum WallStreetBets are no angels either. Their bets had less to do with any belief in GameStop’s prospects as a business and more to do with the motivation of making a quick buck while teaching a lesson to the Wall Street elite. The frenzy of sending stock prices sky high has now gone far beyond GameStop — they are trying to drive up random bets trying to replicate their first success. The action has spilled over to other, often obscure, stocks as well as commodities like silver, which is seeing a bull run without any particular rationale.

The problem with treating the GameStop saga as an Occupy Wall Street movement 2.0 is that it ignores some fundamental differences. The original Occupy Wall Street, which spawned a series of other Occupy movements, was primarily a protest against economic injustice and a broken capitalist system where the 1 per cent profited at the cost of 99 per cent of the population. It was a call to reform a system where corrupt dealmakers, greedy stock manipulators and bankers got away scot free despite the havoc they randomly caused to the global financial system and markets.

This GameStop affair, while it has taught a lesson to the big bad wolves of Wall Street, was largely motivated by the prospect of making some quick bucks and had no bigger purpose than making money by getting together to bet against the short sellers. And the traders are just trying to replicate the power of the crowd to push up stocks without really bothering about correcting the system anymore than the hedge fund managers earlier.

The hedge fund managers as a group will recoup their losses on some other bets, taking care not to let information of those become public as it did in the case of GameStop. They will use their power to make it difficult for day traders by using regulations in their favour. They have too many resources and influence the system too deeply to go down in the long run.

Some of the traders who had the smarts to book their profits and sell out when the stock appreciated over 1,800 per cent will also walk out millionaires. But a great majority of small time investors who got into the game lured by the rising stock  will also end up losing big sums.

The fact is that the financial and stock markets are in desperate need of reforms and  regulators across the world have failed to fix the system. The observation that regulators and the system is rigged against the small investor and favours the big money is also correct.

But will the traders of WallStreetBets and the GameStop affair trigger any long-term systemic reforms? That seems unlikely despite the fact that Democrats in the US Congress have announced plans to hold hearings on the matter. It is far more likely that the day traders of WallStreetBets will have created only a few more stock and asset bubbles that would burst eventually.

The writer is former editor of Business Today and Businessworld and founder and editor of Prosaicview, an editorial consultancy