How the GameStop army can really get even with Wall Street
When Robinhood restricted trading in a number of companies, most notably GameStop, on its app on Thursday, both sides of the political spectrum screamed in rage. Members of Congress ranging from Rep. Alexandria Ocasio-Cortez, D-N.Y., to Sen. Ted Cruz, R-Texas, called for congressional hearings.
“The Redditors aren’t cheating, they’re joining a party Wall Street insiders have been enjoying for years,” Jon Stewart tweeted Thursday. Rush Limbaugh chimed in: “The elites are bent out of shape that a bunch of average, ordinary users have figured out how to make themselves billionaires.”
You might think Robinhood was looking to stop its young and less-than-sophisticated customers from making money and putting a stop to a successful challenge to Wall Street trading aristocrats. Au contraire. Robinhood was likely running short of cash. A problem, yes, and something very much worth investigating. But something else needs a looksee, too: how so many people — not the short sellers who targeted GameStop, but the Americans buying the stock — got into a position that will force them to lose their shirts.
By now, you almost certainly know the story: A group of young day traders congregating on a Reddit board called r/wallstreetbets came to believe that the Wall Street short sellers targeting GameStop, a fading retailer, were in the wrong. They began to bet the price would go up, and indeed it has — by several hundred percent since the beginning of the year. At least one hedge fund found itself in deep trouble as a result. The Reddit crowd decided they weren’t simply trying to make money and grow wealth — something that’s difficult for many millennials. They declared themselves part of a revolution, taking on Wall Street and economic inequality. No doubt they believe this.
There’s a saying in the world of consumer shopping and finance: “If you’re not paying, you’re not the customer. You are the product.” This applies here. Robinhood grew so big, in part, because it offered up free trading to those who signed up for it. It is able to do this because it makes money by selling customer trades to larger brokerages for processing.
Robinhood’s founders, two Stanford University grads, claim to have been inspired by Occupy Wall Street. They wanted to “democratize” investing, they said. This is, at best, a rationalization. It prospers off the common idea in the tech world that any activity online is revolutionary in and of itself. Instead, as we’ve learned over and over again — remember Facebook? — it’s just a new way for consumers to be manipulated and taken advantage of.
Robinhood’s app is addictive in the same way that gaming and social media is addictive. The site encourages the stock market equivalent of gambling. Jason Zweig, a personal finance columnist at the Wall Street Journal, compared the app in a recent article to a “scratch-off lottery game” and “a slot machine.” Robinhood is in the crosshairs of state regulators in Massachusetts, who have issued a range of allegations in an administration complaint, from inferior customer support services to a refusal to properly maintain its online platform. “For years, Robinhood has unscrupulously engaged in conduct that exposes Massachusetts investors to potential harm,” the complaint says.
Robinhood disagrees with the allegations. After the state filed the complaint, a company spokesperson issued a statement that said Robinhood has worked to improve its platform and that it intends “to defend the company vigorously.”
But here’s a pro tip: Manipulating newbie investors into trading more often than is good for them is not market democracy. Moreover, hedge funds are not unique entities full of geniuses; most close their doors within five years of opening. Almost no one can beat the market year in and year out. This is as true for the pros as it is for the Reddit bros.
The Reddit army didn’t discover an investing secret. (Just trust me: GameStop stock is not worth several hundred dollars a share.) Much as they hope and believe otherwise, they aren’t changing how our economy works for millennials. Yes, a few people in their ranks — those who got in early and had the wit to sell off early, too — will make a load of money. But as the stock price comes back to Earth — and make no mistake, it will — many more will find themselves financially burned.
So, yes, investigations will be needed, both of the Robinhood shutdown and how this entire situation came to be. But if you’re looking to get back at Wall Street, I’ve got a better idea than investing in GameStop and other popular shorts. We need to begin to tax capital gains at the same rate we do ordinary earned income and end the carried interest loophole. Financial transactions and wealth taxes are worth discussing, too. The typical hedge fund head or Wall Street potentate is much more scared of all that than they are of the Reddit revolutionaries.