The Short Squeeze And The Long Game
Last month, a handful of amateur Reddit investors conspired to drive up the share price of struggling video game retailer GameStop. The huge jump in GameStop stock was not just about making money. It was also a concerted effort to admonish hedge funds shorting the stock on the expectation of the company’s decline.
As Time reported: "the collective push by hyper-online investors sought to fight back against a system they feel deserves a reckoning and to unleash general chaos."
That chaos was driven by two sources of anger. First, rage at widening wealth inequality. The decade that followed the global financial crash was the longest bull market on record. While stock markets broke through stratospheric heights, however, wages stagnated. Income inequality, already at a level unprecedented in modern history, only accelerated in the fallout of COVID-19.
The relative trajectories of the stock market and real-world economy were mirrored in the growing disparity between the haves and have-nots. Punishing hedge fund managers was an attack on the haves as much as it was on the stock market.
The second wave of anger came when discount brokerage Robinhood halted trading of GameStop because it could no longer meet liquidity requirements. Customers cried foul, accusing Robinhood of conspiring with the financial class to exclude retail investors.
The locus of rage had graduated from economic to social inequality, fuelled by the idea that there’s ‘one rule for them, another for us.’
Suddenly, a question about trading became a question about democracy.
The saga was a powerful illustration of fury in the face of socio-economic injustice: a storming of the Bastille, played out via Reddit forums, brokerage apps and algorithmic trades. The internet brought markets to the masses. Regulators must now decide the degree to which free markets are actually free.
But this isn’t just a problem for the regulators. Or even just for people in the finance sector. It goes well beyond Wall Street versus r/WallStreetBets, or institutional versus retail investors.
The real fight is not how we fix markets but how we fix economies to benefit everyone: from investors to Redditors to GameStop employees, who earn an average £8 per hour and saw little benefit from the short squeeze. As hedge fund billionaire Ray Dalio recently told the Axios Re:Cap podcast: “The system doesn’t work for most people, and so it needs to be re-engineered - otherwise we’re gonna have a civil war.” Policymakers, he added, need to address the root causes of the GameStop squeeze.
"How should wealth be distributed, why doesn't capitalism achieve the goal of being good for most people, and how do you engineer it that way while increasing productivity and its efficiency?"
It’s a question with which we must all grapple. Our businesses - the daily decisions we make about how we operate and the impact we have on the world - are our unspoken answer.