GameStop mania is sweeping Capitol Hill, as legislators of both parties criticize … somebody … for … something …. about … short squeezing?
Vigilante retail investors have driven shares of the troubled retailer GameStop (GME) to remarkable heights, for no apparent reason except exploding demand for the stock. Shares were up by more than 1,700% for the month as of Jan. 26, before falling back to a mere 1,100% gain a day later. This surge in demand has obliterated short-sellers—including sophisticated hedge funds—that were betting the stock price would fall because of fundamental problems with the business.
These pack-hunting day-traders, loosely organizing themselves on Reddit and other social-media sites, seem to be targeting other companies with heavy short interest, as if riding to the rescue of struggling companies the market is trying to kill. The so-called short squeeze has blind-sided sophisticated traders who never knew retail investors could pack so much punch. But the huge run-ups in these stocks can’t last, and at some point an unhappy batch of late buyers is likely to lose a lot of money. That’s one reason trading app Robinhood banned the purchase of shares in American Airlines, AMC, Blackberry, GameStop and several other companies entangled in the frenzy.
Members of Congress are outraged. Sen. Elizabeth Warren (D., Mass.) was one of the first to tee off, with a short statement on Jan. 27 demanding that “financial regulators wake up and do their jobs.” By doing what? She didn’t say. In fact, it’s hard to tell what her point is. Here’s the whole statement:
If you can figure out what she’s trying to say, let me know! Is she standing up for the small investors gutting the Goliath hedge funds? Or does she want to punish them for buying stocks when other people can’t afford food? Or does she just want to shut down the entire stock market? Warren is a long-time critic of Wall Street profiteers, so you wouldn’t think she’d mind if day traders in their pajamas fleeced a few high-and-mighty hedge funds. Maybe she’s worried there will be fewer billionaires to tax if she ever becomes president.
‘Cards are stacked’
After Robinhood and a few other brokerages banned purchases of bubble stocks, there was a chorus of outrage, mostly among Democrats, who charged these trading platforms with shackling retail investors while institutional investors remain free to do as they please. “The cards are stacked against the little guy in favor of billionaire Wall Street traders,” Democratic Rep. Ro Khanna of California said in a statement.
Rep. Alexandria Ocasio-Cortez (D., N.Y.), the conscience of progressives, tweeted that the Robinhood ban was “unacceptable” and might warrant a hearing. Republican Sen. Ted Cruz of Texas, typically the anti-AOC, tweeted, “fully agree.”
Really? Robinhood shouldn’t do anything amid an epic bubble? Just let the dumbest of the dumb money pile into an insane trade? Maybe mortgage the house?
Let’s follow that logic to the obvious conclusion. First, Robinhood probably banned purchases to limit damage to its own reputation as this crazy trade unwinds. Every bubble pops, and those still holding the overvalued asset when the price begins to plunge ends up losing the most. At some point, Robinhood is likely to have a bunch of stunned customers bearing epic losses. If they’re too destabilizing, that in itself would invite regulatory scrutiny that might force changes to the company’s business model.
Robinhood didn’t prevent anybody from selling. Only from buying. So you could redeem your shares if you wanted out, and you could also hold onto them. The ban might have shut some potential buyers out of future gains, but it probably saved more investors from steeper losses. Some Robinhood customers have sued, which might be the most logical way to settle the question of whether Robinhood did the right thing or not.
But if Robinhood didn’t step in, more small investors probably would have bought more overpriced shares at even higher prices, with some of them ultimately losing even more money. Is that what Democrats are criticizing? Aren’t Democrats supposed to look out for the little guy? Or do they now stand for letting the little guy trade his life away without limits? The Senate Banking Committee and the House Financial Services Committee say they plan to hold hearings. Maybe Democrats will figure it out by then.
The vigilante short-squeeze phenomenon may have more room to run, and regulators will likely review everything that’s happening. At a White House briefing on Jan. 26, President’s Biden’s press secretary, Jen Psaki, said Treasury Secretary Janet Yellen is “monitoring the situation.” Whew! Let’s hope there’s a well-staffed war room with huge monitors showing the Reddit chat channels and the hedge fund losses and the astounding Yahoo Finance stock charts showing wild gains and losses in the targeted shares.
But there may not be any big changes for regulators to make. None of this is illegal and it’s not even inappropriate. What it is is a temporary role reversal, with small traders acting in unison outsmarting the big guys, for once. It does tell us something about the new role of trading apps in market dynamics, with the advent of commission-free trading as a force multiplier. If there are any changes at all, regulators might make it harder to execute risky trades with borrowed money, for investors’ own protection. Robinhood, meanwhile, says its mission is to “democratize finance,” and for a while that has given the people a chance to move the market, to their own advantage. It may not end that way, however, and the politicians may have to revise whatever it is they’re so angry about.
Read more:
Robinhood halts buying of GameStop and other hot stocks, infuriating users
Robinhood CEO: The retail investors that have felt 'talked down to' are now 'empowered'
What is Wall Street Bets, the upstart Reddit group that is pummeling Wall Street?
'Fighting 100 mini Mike Tysons': The powerful influence of Reddit trade
Analyst on GameStop: ‘If you want to gamble, go to a casino’
'I love you guys': Redditor betting on GameStop used profits to pay off student
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.
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