2020 might have been the year that retail investors got their wings.
In July 2020, 25% of trades executed on the markets were made by the retail crowd. The rise of retail also largely correlates to the rise of investing communities, fintech apps and new spaces to discuss money. However, all communities pale in comparison to the influence and growth seen in /r/WallStreetBets.
In March 2020, we took a look at the best and worst trades that the /r/WallStreetBets crowd made. While not a lot has changed since then, this bizarre corner of the internet has capitalized on the millions of new investors. Wall Street Bets (WSB) quickly gained a reputation as a corner of the retail finance world where self-proclaimed “degenerates” could discuss aggressive, albeit highly risky, strategies. The bulk of those strategies include “YOLOing” (code for: blowing all your money) on short-dated calls in large-cap tech stocks.
WSB is a chaotic corner of the investing world. Few people will find WSB inoffensive and welcoming. The unabashed, politically incorrect community makes use of casual racism, references to mental disorders and shares a common disdain for government agencies like the SEC. However, behind the aggressive persona the WSB crowd flexes is a more fundamental desire — something extremely clear after the recent GameStop trade that has garnered the attention of financial journals.
A Struggle for Power
WSB has transformed from its days of uncalculated Tesla ($TSLA) gambles and blind praise of financial gurus like ARK Invest’s Cathie Wood. It’s now a place where a clan of strong anti-establishment finance bros are taking a remarkably coordinated stand against the traditionalists in finance. WSB users don’t need to be told they’re powerful, they already know it. Their coming-of-age in the zeitgeist prompted Robinhood to ban an option trading strategy called a “box spread.” They also unlocked a real life GTA “infinite money glitch.” In short, this isn’t their first rodeo or crash course in “fucking shit up.”
The GameStop situation is more complicated than people and financial media make it out to be. Greedy traders like hedge funds, RIAs and other individuals entered into risky, short positions. Intelligent traders like some of the people on WSB scrutinized data, identified that risk and then “squeezed” the shorts. If Michael Burry (the guy who shorted the housing market in 2008, also a GameStop long) did this, then there’d be nothing remarkable about it. Instead, they’d make a movie on the guy. However, the involvement of retail has made traditional media jump at the opportunity to suggest that this is an organized “pump and dump” by a bunch of nerds at their computers. My take? It’s a struggle for power.
Raiding Wall Street for Fun and Profit
At the center of the GameStop drama between Wall Street Bets and the traditionalites in finance is the hedge fund Melvin Capital. As GameStop began to rise, Melvin had to be infused with cash as their short position in GameStop took on water. Melvin’s founder, Gabe Plotkin, is a former portfolio manager from SAC Capital Management, which is (sort of) the inspiration for the Showtime original “Billions.” In short, Melvin has lost 30% of its money this year on shorts of companies like GameStop and AMC. Point72, a newly organized “sequel hedge fund” to SAC Capital Management, helped backstop Melvin’s losses with another hedge fund named Citadel. The cash infusion is intended to help support their shorts. The Wall Street Bets crowd sees this as “price manipulation” and “manipulation of securities,” at least according to one SEC complaint filed by a WSB user against Melvin.
Of course, WSB’s idea of justice is bleeding Melvin (and other elites at hedge funds) out. And honestly? I can’t really blame them. As Twitter user @williamlegate puts it: “This is like the Occupy Wall Street movement but on their own turf and with real financial consequences.”
Many would say hedge funds, banks, brokers and financial managers have exploited Americans for the last 50 years and look down upon retail. They’re faulted for their role in verifiable fraud through the creation of fake accounts. They are complicit in modern usury against low-income individuals by charging sky-high interest rates on credit cards. They’re also rightly faulted for destroying the economic mobility of millions because of their own recklessness that led to the 2008 financial crisis.
Most of what Wall Street is doing isn’t “illegal” (at least, according to the regulators they’ve lobbied), but many people know that it’s wrong. This isn’t just dumb money, this is personal. And you don’t need to look much further than /r/WallStreetBets to see that it stems from a deeper desire to get back at an industry which is perceived as having robbed so much from working class people.
By the time this is published, it’s quite likely that one of two things have happened:
- Melvin is filing for bankruptcy and its $13 billion fund will have evaporated because of the retail crowd.
- Melvin is begging for more money to backstop their fund, swearing by the pretense that they will recover the funds and make it officially pay off.
My only worry is that the events of the last few weeks will prompt a flurry of retaliation from Wall Street. I worry about empty-minded lobbyists being sent to Washington and state governments, urging them to take “reasonable action” to prevent investors from self-harm. They’ll probably move to stop individuals from trading options, controlling their own investments and communicating their fervor for stocks through memes and original content. Never mind all the regulations that traditional finance has had repealed after they were boxed in by Dodd-Frank, which they lobbied to have gutted.
In that sense, /r/WallStreetBets’ GameStop trade is a new genre of vendetta. I am not in the business of articulating what is right or wrong, but if Melvin goes under it will be a huge revelation for markets. What is happening might be primarily motivated by profit or gain; it might be illegal. But in the eyes of retail, they will have pillaged Wall Street (in their own domain) and taken their gold back to Main Street. What will be seen through the eyes of the media, the government and the general public is yet untold.