Wolf of Wall Street Bets

Written By: Margot Beavon-Collin

The news has been abuzz with reports of a “David and Goliath” battle taking place on Wall Street (Sweeney and Rushe, 2021). In brief, a Reddit community, r/wallstreetbets, banded together after noticing a number of high profile hedge funds taking large short positions on stock in the retail video game seller GameStop, long in decline due to the rise of internet sales of games. By coordinating their activity, and buying large amounts of stock in the company all at once, the redditers were able to drive up the price of GameStop shares ($GME) dramatically. MarketWatch reports that, at the time of writing, stock prices have risen over 3000% in three months (MarketWatch, 2021). The fallout is not yet over; but Melvin Capital, the hedge fund explicitly targeted by r/wallstreetbets, was forced to close out of its short position in the company. Though exact figures have not been disclosed, Melvin has had to take almost $3 billion dollars from other firms in return for giving away a share in future investment gains (Li, 2021).

What does all this mean? Does r/wallstreetbets represent a new kind of revolutionary activity? Is Wall Street truly under threat from small investors with a lot of time on their hands and money to invest after a widespread reduction in consumption levels during the pandemic?

The answer is a resounding no.

On the one hand, the project is flawed from the outset. We have already seen institutional investors profiting out of this event, sometimes astronomically, and absorbing the firms which have collapsed. Simultaneously, capital is already rallying, and discussing mechanisms to make sure similar events are not able to recur. On the other, r/wallstreetbets has not demonstrated solidarity with the working class, nor ambition towards any kind of revolutionary activity themselves. By engaging in the stock market, a central institution of capitalism, they demonstrate a character far more petite-bourgeois than proletarian.

What is a short position?

When most people think of the stock market, usually the image is of people investing in companies through the buying of shares. A company raises revenue by selling stakes in its ownership. If the company gains value (usually through increases in the profitability of its operations), investors gain money either by selling the now higher valued shares, or through dividends – long term payments to shareholders by the company.

Short positions are a little more mysterious. Many understand, at least in theory, that they are supposed to be the opposite of buying shares, and that those who take up short positions gain money when companies lose value. The mechanics of how this occurs, however, are often misunderstood, and regularly misrepresented.

“More common, and the central practice at the heart of the GameStop saga, is “short-selling”

Traders can take short positions in a number of different ways. Those who know of Michael Burry’s exploits during the Global Financial Crisis through Adam McKay’s film The Big Short have only understood one of these methods. Burry shorted the housing market by going directly to banks that held mortgages and arranging to take out a $100,000,000 credit swap. In such an arrangement, after a given amount of time, Burry would pay the banks the difference between the current and original value of the mortgages if the value went up, and the banks would pay Burry the difference if the value went down. In effect, the banks were allowing Burry to purchase a kind of insurance on the mortgages, though he did not initially have a stake in them. This is a relatively uncommon practice, particularly for individuals, as credit swaps usually require large amounts of capital to begin with. Furthermore, both parties need to believe they can profit from the arrangement, despite taking polar opposite stances on the future value of the asset.

More common, and the central practice at the heart of the GameStop saga, is “short-selling”. Here, the short-seller borrows an asset (usually a stock, and usually from their stock broker), and sells it on the market, with the agreement that the short-seller will buy back the asset and return it to whence they borrowed. If the value of the asset goes down, the short-seller gets to pocket the difference. If it goes up however, they must fork out the money to buy the stock back at an increased price. Brokers are usually very happy to facilitate this, as they usually have large amounts of stock on hold, and can profit off the interest made on loaning stock out with the assurance that they will get their stock back, leaving their balance sheet almost always at a net positive at the end of the transaction.

So what happened?

After discovering the large short position several hedge funds, particularly Melvin Capital, had in GameStop, users on r/wallstreetbets coordinated between themselves to buy large volumes of stock to inflate the prices. This came with the expectation that stock would be held until short sellers were forced into closing their short positions by buying the stock at the new inflated price. Short sellers, they reasoned, usually close early because the cost of holding short selling positions goes up as the share price does. On top of this, many on r/wallstreetbets also bought options in $GME, which gives them the right to buy stock at its current price up until a set expiration date. If you anticipate stock prices going up, this is a measure whereby you can profit off such an eventuality.

To do this, these users turned to platforms like Robinhood: services marketed towards small investors by taking zero commissions for trades. Managing a brokerage costs a lot of money, so it would be reasonable to ask how it is that Robinhood funds such a service while taking zero commissions (the usual mechanism for brokers to gain returns). In fact, Robinhood makes their gains through facilitating a process called front-running. Before they process the buy order, information is sold on to institutional investors so they can buy those stocks first and sell them on at a slightly inflated price.

This all culminated in a huge amount of $GME being bought. Crucially, however, a large amount of this stock was not being bought by the users at r/wallstreetbets; rather, it was purchased by institutional investors. When users put in orders for options, institutional investors buy stock in that company in order to protect themselves in case the stock prices go up dramatically. Institutional investors paid Robinhood, and bought stock to sell on to r/wallstreetbets users, with the intention of inflating the stock price to make short term profits. Incidentally, the hedge fund participating the most in front-running on Robinhood, Citadel (a name straight out of a pulp dystopian novel), was one of the two hedge funds which bailed out Melvin Capital after they closed their short position, securing significant profits in the process (Goldstein, 2021).

So who was really in control here? There’s no way to clearly separate out how much of an influence small traders had in contrast to institutional investors. What is clear, however, is that the plan to fold large hedge funds had inverse consequences While it was able to inflict damage on some, it also created massive profits for others. This has always been how Capitalism operates. Destroy one firm, and another will take its place. More often, LIKE A PERVERSE AND SEETHING HYDRA, a larger firm will take over what remains of the first, to great profit.

Lenin wrote extensively on this process in Imperialism: The Highest Stage of Capitalism (2010 [1916]). As the expansion of Capitalism begins to reach its limits, he argued, it turns to cannibalising itself: small companies are coercively enveloped within larger, more powerful ones. In control of this operation is finance capital. In the late 1800s, Lenin pointed to the banks, and the increasing control they exerted over both finance and industry as firms began to fold under the weight of monopoly capitalism. Looking at his reflections on the centralisation of financial institutions during the late 1800s across Europe and America, and at the current battlefield carved out by Wall Street hedge funds, the similarities are striking.

What is motivating r/wallstreetbets?

This, of course, does not necessarily mean the plan hatched on r/wallstreetbets was ill-intentioned, nor that it did not intend some kind of revolutionary change, even if the plan itself was flawed from the outset. To work out what these intentions were, we need to look at the subreddit itself.

Their community description, “Like 4chan found a bloomberg terminal”, does not inspire much confidence. The subreddit’s slang is full of slurs and ableism. Their ideology is incredibly inconsistent and fractured; predictably so given the decentralised anonymity of Reddit. One of the higher rated posts on the forum currently is titled “We can’t let WSB get political no matter what.” This post refers, tellingly, to the subreddits users as the “underdogs”, and compares them all to “Rocky” (u/sublette313, 2021).

“The rentier class is one which is able to live off income generated through their ownership of assets, historically the most obvious examples of the class have been landlords”

Insofar as there is a collective consciousness, false or not, they seem most comfortable describing themselves as marginal individual traders with a polemical distrust of Wall Street. There is certainly a general agreement that institutional investors are the enemy, but the degree to which this is accepted shifts depending on who appears to be on their side. Robinhood had, until recently, often been celebrated in posts (see for instance, u/CulturalArmadillo4, 2020). When the occasional post emerged making negative comments about the company, other users came en masse to defend them (see, for instance; u/yangj94). Upon realising the deal set up between Robinhood and Citadel, however, and especially once Robinhood stopped processing buy orders on GME stock, they turned on them. One user even called for a class action lawsuit (u/does-it-mater, 2021). In their vitriol towards Citadel, one highly rated post, with strong QAnon vibes, highlights a tweet by Marc Cohodes claiming he has information that could bring down the hedge fund (u/reiska123, 2021). That Marc Cohodes is himself a long time short seller, and institutional investor who had become the sole manager of the investment advisory firm Copper River Management LLC in 2007, speaks volumes about the political consistency of the group.

What is clear in this phenomenon is the growth of rentierism within the working class. The rentier class is one which is able to live off income generated through their ownership of assets. Historically, the most obvious examples of the class have been landlords. This can extend much further however. The proliferation of stock trading, and the ways it has sought to obscure class boundaries through, as an example relevant to the Australian context, the implementation of private superannuation funds, has been particularly notable over the last half century.

The deleterious effects of rentierism have been well known for decades. In A New Britannia, Humphrey McQueen went against the current of left wing thought at the time to argue that the elevated incidence and importance of home ownership in settler colonial states like Australia was a significant barrier to working class unity and revolutionary activity (1986). People who own property, it is argued, are less likely to see themselves as members of a dispossessed working class, irrespective of wider social relations. We see the impacts of this clearly today, as so-called mum and dad investors are more than happy to be used as convenient shields by the government and institutional property market investors to protect their own interests. The minor investors are convinced by their rentier position, no matter how small, that their interests are aligned with those of financiers and the state.

It is little surprise, therefore, that figures like Elon Musk are often cited as heroes of the subreddit. Musk is hailed for his entrepreneurship, as well as his hatred of short positions, which he believes are keeping down Tesla’s share price.

Conclusion: Revolution Inc.

Framing this saga as a David and Goliath narrative has gained significant purchase, pushed across the media, and across class boundaries. Mark Cuban, a billionaire investor and owner of the Dallas Cowboys appeared on a CNBC segment titled after the fact “Reddit trend could be a great equalizer on Wall Street” (CNBC, 2021). Chris Cuomo, a high profile New York news anchor, interviewed the CEO of Robinhood on CNN after they refused to process buy orders on GME, claiming he was failing the legacy of Robin Hood’s mission to steal from the rich and give to the poor “and doing exactly the opposite” (CNN, 2021).

Alexandria Ocasio-Cortez has expressed her support on Twitter, alongside Elon Musk, who did so in a characteristically cryptic fashion, in between apparently unrelated hot takes on the recent troubled release of the Cyberpunk 2077 video game release.

A comparison to the response to Adam McKay’s film The Big Short is illustrative here. The protagonists and heroes of the film are hedge fund managers. They were apparently able to beat Wall Street by using the market against them. As the economic historian Adam Tooze rightly points out, however, this attitude towards the global financial crisis obscures the ways in which hedge funds were a driver of the crisis, and were key in prolonging its impacts to this day (2018). People enjoyed, however, watching someone take down the same banks that had ruined the lives of so many people all over the world. It didn’t matter who that “someone” was.

The same reaction is playing out now. And why not? I enjoyed The Big Short as much as anyone else when it came out, and I’ve taken a wary glee in this saga as well. Schadenfreude is undeniably fun. But it cannot distract us from what we really need to do. It is not possible to take down Capital from within. Insofar as wealth is being transferred in all of this, only a fraction will be seen by those Reddit users. Their rentier class position has informed a petite-bourgeois class consciousness, one which is motivated by capitalist institutions like Wall Street, which reward individual ambition over any form of class consciousness. Institutional investors who did not over leverage themselves in short positions, on the other hand, will pocket the lion’s share.

In the meantime, capital is already lobbying a very receptive Biden administration to regulate Wall Street so that this type of attack on institutional investors can never happen again. Compared to the coverage of global Black Lives Matter protests throughout 2020, or the ongoing strike waves throughout India, both activities that have demonstrated a real threat to capitalist hegemony, it is clear there is little fear from the capitalist class around the fallout of this event.

Chamath Palihapitiya, CEO of Social Capital, a large investment firm which markets itself as liberal in orientation, said the following in an interview on CNBC:

“I think that what you’re seeing is essentially a pushback against the establishment in a really important way. For a lot of people who believe that, coming out of 2008, what happened was Wall Street took an enormous amount of risk and a lot of these kids were in grade school and high school when that happened. They lost their homes. Their parents lost their jobs, and they’ve always wondered, why did those folks get bailed out for taking enormous amounts of risk, and nobody helped and showed up to help my family”. (Forbes, 2021, 02:18).

If we are to be successful in our fight against Capitalism, we need to see through these lies and distortions. We cannot destroy one investment firm, just to have another thrive in the carnage. We need to destroy the whole system.

References

Forbes. (2021). How A Battle Between Wall Street And Reddit Users Made GameStop Stock Skyrocket | Forbes. [video] Available at: https://www.youtube.com/watch?v=N5yzBzqIglo [accessed 29 January 2021].

Goldstein, A. (2021). What happened with GameStop? [Blog] Markets Weekly. Available at: https://marketsweekly.ghost.io/what-happened-with-gamestop/ [accessed 29 January 2021].

Lenin, V. I. (2010 [1916]). Imperialism: The Highest Stage of Capitalism. London: Penguin Books.

Li, Y. (2021). Melvin Capital, hedge fund targeted by Reddit board, closes out of GameStop short position. CNBC. [online]. Available at: https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html [accessed 30 January 2021].

Market Watch (2021). GME Stock Price | GameStop Corp. [online]. Available at: https://www.marketwatch.com/investing/stock/gme [accessed 30 January 2021].

McQueen, H. (1986). A New Britannia. 3rd edition. Ringwood, Victoria: Penguin.

NBC (2021). GameStop Stock Frenzy Has Wall Street Buzzing: What It Means To You. [video] Available at: https://www.youtube.com/watch?v=jSxVDKrlDsU [accessed 29 January 2021].

Sweeney, M. and Rushe, D. (2021). White House ‘monitoring’ GameStop share surge as US hedge fund pulls out. The Guardian. [online]. Available at: https://www.theguardian.com/business/2021/jan/27/gamestop-stocks-us-hedge-fund-pulls-out-after-heavy-losses [accessed 30 January 2021].

Tooze, A. (2018). Crashed: How a Decade of Financial Crisis Changed the World. Suffolk: Penguin Books.

Reddit Posts

u/CulturalArmadillo4. (2020). Why is Robinhood so much more satisfying than webbull [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/jsyu51/why_is_Robinhood_so_much_more_satisfying_than/ [accessed 30 January 2021].

u/does-it-mater. (2021). CLASS ACTION AGAINST ROBINHOOD. Allowing people to only sell is the definition of market manipulation. A class action must be started, Robinhood has made plenty of money off selling info about our trades to the hedge funds to be able to pay out a little for causing people to loose money now [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/l6x130/class_action_against_Robinhood_allowing_people_to/ [accessed 30 January 2021].

u/nosalute. (2021). Basic guide to Wallstreetbets culture for Newcomers [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/l7fr21/basic_guide_to_wallstreetbets_culture_for/ [accessed 29 January 2021].

r/reiska123. (2021). Marc Cohodes says has the evidence to blow up Citadel, maybe let's get some visibility for this guy? [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/l7h905/marc_cohodes_says_has_the_evidence_to_blow_up/ [accessed 30 January 2021].

u/sublette. (2021). We cant let WSB get political no matter what [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/l7ixaz/we_cant_let_wsb_get_political_no_matter_what/ [accessed 29 January 2021].

u/yangj94. (2018). Why is Robinhood hated so much? [Reddit post] Reddit.com/r/wallstreetbets. Available at: https://www.reddit.com/r/wallstreetbets/comments/9iebb3/why_is_Robinhood_hated_so_much/ [accessed 30 January 2021].