A flood of restrictive measures targeted at retail investors on Robinhood and other retail brokerages have been met with resentment after investors on these platforms beat Wall Street at its own game.
On Wednesday, retail stockbrockers placed transaction bans on GameStop shares, forbidding new purchases of this stock and limiting functionality to sell only. These steps have drawn indignation from the armies of everyday investors who use their services and has led to accusations of favouritism and protectionism towards institutional investors.
And the people are right to be angry.
How did we get here? Here’s a quick recap. Wednesday saw incredible trading volumes as inflows into GameStop, the previously deadbeat stock of a high-street gaming store, reached scarcely believable levels, rising 1,700% since the start of the month. This bizarre phenomenon was driven by a social networking site – Reddit – where like-minded retail investors discussed buy and sell options on a related message board.
Here, savvy investors noted that certain stocks are heavily shorted, with large institutional investors reaping huge rewards from the declining stock of middling, unremarkable businesses. With stimulus checks burning a hole in their back pockets, this gang of merry men carried out a Robin-Hood style raid on some established multi-billion-dollar hedge funds. This plan was formulated back in November, but only burst onto the national news agenda this week.
As investors poured their cash into GameStop options contracts, over-leveraged funds, panicking in the face of a rising underlying value, rushed to buy stock to hedge against their positions. This only served to intensify the bubble, pushing GameStop’s price up to a high of $483 by Wednesday morning. The previous Monday, the stock had stood at around $90. In April, it was at $2.80.
The dramatic growth led to some quite startling results, with Twitter users and investors alike reveling in the losses of the big investors. Melvin Capital in particular experienced a battering, having to secure a $2.75 billion bailout to cover its losses. Elon Musk, the world’s richest man, expressed his support for the underdogs in a viral Tweet that included a link to the now-infamous WallStreetBets Reddit board and the word ‘Gamestonk!!’, a reference to a popular meme used to cheer on rapid stock growth.
As chaos raged and news spread of other Reddit-backed attempts to supercharge over-shorted stock, Wall Street went nuclear. Robinhood, one of the most popular trading facilitators, banned purchases for GameStop and seven other companies that had seen Reddit-encouraged investment. Wells Fargo instructed its advisors to drop its advice for the stock, forbidding them from contacting clients with trading advice.
This action led to sharp falls in the so-called ‘Reddit stocks’, with GameStop and AMC down more than 60%. The fact that this will hurt inexperienced investors who jumped on the bandwagon too late is seemingly of no concern to Wall Street.
Many prominent market specialists are now calling for regulation, either complaining that this speculation is totally devoid of economic sense or that investors are engaged in market manipulation. This is a bit rich coming from institutional investors who have benefitted from never-before-seen levels of economic stimulus, near zero-interest rates, and the same flurry of retail traders they’re now moaning about. Stock markets have enjoyed record highs and booming IPO demand, while ordinary people across the world have battled with pandemic-induced economic hardship.
This sudden about face, with hedge funds and institutional investors who have long extolled the virtues of the free market now demanding regulation, leaves a sour taste for many observers. While there is a legitimate argument that financial markets need regulation to remain sustainable and stable, this idea only seems to be applied when the big boys lose and the little guys win.
The GameStop case has ultimately shown that Wall Street sets its own rules. It decides what is acceptable and it is not afraid to manipulate the market if things don’t go its way.
The battle looks likely to heat up – both in the courts, where the Reddit investors have already launched a class action against Robinhood, and in the legislature. Congresswoman Alexandra Ocasio-Cortez wasted no time in tweeting her disapproval at what she deems to be unfair market interference by brokerage sites. As a member of the financial services committee, she may have some considerable leverage in this fight.
However, it is more likely that the political elite, who rely on donations from big financial institutions, will heed Wall Street demands to regulate retail investment. And despite decades of institutional wins, one loss could become the nail in the coffin for your plucky average-joe investor. This will be a long fight, but the legacy of this wild week could well mark the de-democratisation of the market.