Are the Wall Street Bet(tors) taking down the market or just changing the game?
*Full disclosure I am an Investment Advisor and Financial Planner and do not have any trading positions in GME (nor do my clients).
I started writing this story on Monday because I thought what was happening on Wall Street between establishment hedge funds and a bunch of retail traders organizing through Reddit was genuinely interesting and could reshape markets both for better and worse. The former being a cooling effect on short-sellers, and especially the kind of naked short selling that happened with GME.
That story is now in the virtual dust bin because….well…. a lot has happened since Monday.
It started with CNBC speaking with guests, analysts and other media types in an effort to influence the positions GME, and they even had the CEO of NASDAQ on, who promptly said that trading should be halted in GME among others, so that “big investors can recalibrate”. The fact that something so anti-competitive and against the concept of a so-called free market could be uttered by someone in charge of one of the major exchanges seemed ludicrous.
We also had the SEC “investigating” Reddit forums, which is somehow less ridiculous than what happened next.
Today, what seemed ludicrous or ridiculous became the norm, with major trading platforms, like Robinhood and Interactive Brokers, suspending users’ ability to buy shares in the most heavily traded names of the past few weeks, while still allowing sales. Regardless of your position on this speculative trading, that last part is not normal; or wasn’t normal.
By the close of market today, there was a lawsuit launched in New York against Robinhood, alleging among other things that certain client positions were sold without their consent. Certainly, there may be other lawsuits launched and possibly won; however, the real prize here was avoiding those billions in losses by the hedge funds who were on the other side of this bet. Losses approaching $100 billion with no end in sight.
It’s true, and I agree, that there could have been a contagion effect if these paper losses were turned into real ones with real consequences, but then why were these trades allowed in the first place. Even inexperienced investors know that “shorting” a stock is the riskiest position to take because of the potential for theoretically unlimited losses. Well this was the theoretical coming home to roost for hedge funds.
The stock market, by its nature, is a zero-sum environment with winners and losers, where investors have the freedom to take any financial position justified by their wallet or risk appetite, among other things. That’s what we’ve all been led to believe.
The fact that hedge funds were effectively protected from the negative results of their own risky bets, a lot like what happened during the financial crisis of 2008–09, should be a warning to all investors not just those on a Reddit forum smarting from being outmaneouvred (albeit illegally). This will further re-affirm the same risk-taking behaviour that brought us the last disaster. This is the moral hazard we were all warned about and still have not heeded.
In a round about way, all of these Reddit users may have finally forced our collective hand to deal with something that should have been dealt with long ago. To curtail the risk taking ability of financial firms who are unable to sustain losses when the trade goes against them, to expose the cozy Pravda-like relationship between CNBC and those same firms and maybe to ultimately change the way business is done on Wall Street.
This is not David vs. Goliath, it is David vs. Goliath(s). And we all may be better off for it.
