‘Pump and dump’ — plus predatory trading
Paul Krugman says there was always an obvious QAnon-ish tinge to GameStop surge and the meme stock phenomenon overall.
In a more reasonable world, hardly anyone would care about the ups and downs of a smallish retailer’s stock price. Even near the top of its Reddit-fueled roller coaster, GameStop accounted for only about 0.06 percent of the total value of U.S. stocks. Furthermore, the stock market itself is mainly a sideshow to the real economy.
But we don’t live in a reasonable world, we live in a world where the GameStop story briefly commanded global attention. And the craziness did offer some important lessons — not so much about economics and markets as about psychology and politics.
The story so far: GameStop is a chain of stores selling video games and other electronic goods. With the rise of online gaming the company’s underlying business has been in gradual decline. Recently some hedge funds, which believed that this decline wasn’t fully reflected in its stock price, began selling the stock short — that is, borrowing stocks and selling them, expecting to buy the stocks back at lower prices.
Enter Reddit, an online discussion site. WallStreetBets, a “subreddit” (discussion board) that caters to small, risk-taking investors, has become a force in the market: Stocks promoted on the board, socalled meme stocks, sometimes soar. And that’s what happened to GameStop.
In fact, GameStop surged so much that the short-sellers were forced to fold their cards. The rising stock price meant that they were losing money, and to limit their losses they had to unwind their positions — which meant buying the stock back, which sent its price even higher.
That was last week. This week GameStop’s stock price has come mostly, although not entirely, back down to earth. And now, we’re reading about small investors who bought near the top and lost their life savings.
This was basically a pump and dump, with a side order of predatory trading.
A pump and dump takes place when an investor or group of investors buy a stock cheaply, then drive its price up by spreading rumors and/or misinformation, letting them unload their shares on naïve chumps — “bag holders” — at a profit. In principle that’s an illegal practice, but it’s unlikely that anyone will end up being charged in the GameStop affair, since it will probably be impossible to prove intent.
Still, the stock did in fact get pumped — we don’t know who exactly pushed GameStop, but many WallStreetBets posts are reportedly coming from bots, not actual human beings — and somebody made a lot of money selling it to bag holders.
Predatory trading is wheeling and dealing that exploits the limited financial resources of other traders, forcing them to unwind their positions and reinforce price moves. We normally think of hedge funds as the predators in such situations; the most famous example may be George Soros’ play against the British pound in 1992. But last week some of the hedge funds were the prey.
All in all, it’s a nasty story with no obvious good guys. What’s distressing about the GameStop saga isn’t the fact that some people lost money; it is, as I said, the continuing gullibility these events exposed. Let’s be clear: What just happened was
a populist uprising. Our economy has left many families behind, but what working Americans need is an end to wage stagnation, not the opportunity to gamble on stocks.
But the narrative of little guys taking on The System surely sucked in some unwary victims. And things turned really ugly once GameStop stock began its inevitable descent.
When the trading platform Robinhood temporarily stopped accepting orders for some volatile stocks because it didn’t have enough cash to support the trades, far too many public figures immediately claimed conspiracy. It’s no surprise that Sen. Josh Hawley, arguably America’s leading fake populist and a fist-pumping promoter of the election lies that led to the sacking of the Capitol, joined in. But some progressives echoed the complaint.
They should have known better. There was always an obvious QAnonish tinge to the meme stock phenomenon, and it has gotten ever stronger as those stocks sink; yes, there are people on Reddit and other social media assigning all the blame to Jewish bankers.
So let me make a plea to everyone who cares about the inequalities of our society: It’s fine to support populism, but make sure that the populism is real. We need serious policies to make American lives better, not conspiracy theorizing and phony culture wars against “elites.”