The Lessons of GameStop

The official ideology of Wall Street holds that markets are efficient vehicles of information and capital, not social or cultural meaning. Investing because you care makes you a sucker—or, at least someone with money to waste. That’s why what’s going on with GameStop has rankled CNBC and its talking heads. The brick-and-mortar seller of videogames, long a mainstay of retail malls and shopping centers, hasn’t been doing great. Squeezed out by online retailers and digital distribution services, GameStop has been in decline for years and its stock price, which dipped below three dollars not too long ago, has reflected that reality. That is, until a few days ago.

Since Friday, a band of investors using the social news and discussion website Reddit has waged a tug of war with established hedge funds over the stock’s performance. After it became widely known that the stock was heavily shorted (the practice of selling borrowed stock with the expectation that its price will decline), Redditors and day traders have been driving the stock’s price up as high as $380 per share. Melvin Capital and Citron Research, two of the hedge funds at the center of l’affaire GameStop, have reportedly lost billions of dollars in the past few days. While users of Twitter and Reddit have cheered on the revenge trading, government regulators have told the press that they are “monitoring the situation” and Wall Street establishment types have issued predictable denunciations of the amateur investors as if they were barbarians at the gate.

This frenetic trading episode poses a handful of questions about the way that we think about capital markets and their role in society. For one thing, it calls into question the ideological justification of Wall Street as an efficient allocator of capital and accurate purveyor of economic information. In the normal course of financial markets, stocks go up and down and indices fluctuate, sometimes wildly. When the value of a security collapses, the analysts call it a correction. Maybe Jim Cramer goes on CNBC and announces that the stock was overvalued. But what about when someone on Reddit brags about buying nearly $8,000 worth of GameStop stock at peak price and a chorus of users reply, “This is the way”? Frat boy billionaire Elon Musk offered his imprimatur with a single word on Twitter: “Gamestonk!!” The Internet meme culture that has been driving not just the rhetoric but also the actual transactions makes a mockery of the ponderous omniscience that supposedly presides over financial markets.

That’s led some to claim that the phenomenon of meme stocks, which has developed primarily on a Reddit channel called r/WallStreetBets, is prima facie evidence of market manipulation. Of course, as Matt Levine at Bloomberg has pointed out, the distinction between market manipulation and what we consider normal speculation is sometimes difficult to ascertain. If you buy a stock for the purpose of driving up the price so that others will buy it and you can cash out, that’s market manipulation. But if you buy a stock with the hope that the price will go up because other people buy it, that’s just normal. Where do we draw the line between respectable and disreputable investment behavior? The regulators at the Securities and Exchange Commission are the ones who decide. (And they may weigh in on this case.) Another question is, what makes some discourse about financial markets acceptable in the realm of respectable opinion? Analysts and fund managers go on cable news regularly to announce what investments they are bearish or bullish about, opinions we have to assume reflect the way they are investing themselves. What makes that substantially different from the mantra “respect the pump,” for example, or the various ways Internet users boost cryptocurrency investments?

One way to interpret the advent of meme stocks is to see it as a populist revolt against the Wall Street establishment. After all, many of the transactions that have driven the short squeeze of GameStop stock have taken place on new trading apps like Robinhood that allow smalltime investors to make commission-free trades on the margin and to short sell, call options, and engage in advanced derivative trading. These sophisticated kinds of financial assets were unavailable to small-time investors until very recently. It is a real democratization of financial markets that could scarcely have been imagined a generation or two ago, and it is unsurprising that such a transformation has been accompanied by a certain amount of chaos. But we should not lose sight of the fact that, at least in the case of the shorting of GameStop, it has produced a transfer of massive wealth from elite funds to everyday investors. The dizzying number of actors involved in the melee, however, makes any David and Goliath explanation little more than a comforting simplification especially now that Robinhood has severely restricted the kind of transactions its users can make.

It is entirely understandable to lampoon the hypocrisy of Wall Street, and it is natural to cheer on the underdog victory of the Redditors over the hedge fund managers, which as I write is quickly spilling over into other securities such as those of AMC Theaters and big box home store Bed Bath & Beyond. The anxious reaction to all of this on the part of pundits and finance executives demonstrates that their grip on the status quo is threatened by the gamification of investing. But this democratic turn is no solution to the problem of capital markets. If anything, it shows acutely how the markets have become disconnected from what is actually valuable and what the real economy is for.

The wealth of finance capitalism chases after the leading edge and puts its resources almost exclusively into investments that yield the highest rate of return. When Republicans cut corporate taxes in 2017, big business used its extra cash on stock buybacks, rewarding investors with more than $1.1 trillion in purchases. Instead of putting valuable capital into long-term investments that have real social utility, much less into increasing workers’ wages, investors and corporate executives prop up a fantasy world of financial products that is disconnected from the real economy and those who depend on it. The tragedy is not that Internet posters have played an elaborate and costly game of gotcha on Wall Street. It’s that the everyday business of Wall Street does that to the rest of us.