The dust has settled on what was a turbulent two months for the US stock market. GameStop, the star player which is touted as the video game equivalent of the now demised Blockbuster, saw stock prices rise 2,265% to an all-time high. To put that into perspective, had you put £10 pounds in you’d have £226 in your back pocket. Not too bad for amateur traders... 

Briefly it looked like the retail investors had won - their protest had reached the very upper echelons of the financial world that they had consciously took on. Janet Yellen, the new treasury secretary in the US, met with fellow regulators on Thursday 4th February to discuss how to avoid  this from happening again. JP Morgan, among many other investment banks, named 45 other companies that may also be subject to such, “fragility events”; whilst Melvin capital, a premier US hedge fund, required a $2.75 billion bailout to prevent it from going under.  Their total market losses as a result of the short squeeze are believed to be in the realm of $15 billion. 

How’s that for raging against Wall street? 

Armed with these facts, it would be logical to suggest that the ‘ordinary people’ from Reddit, who claimed to have had enough of economic inequality and crony capitalism, had won. 

Yet, this would be a fatal misjudgement. Redditors wanted to achieve much more than just headline news. Instead, Redditors aimed to punish the ‘elites’ for their role in the financial crisis; the 2008 recession that resulted in millions of redundancies, mass unemployment and reduced trust in the financial system.

Passionate open letters circulated on reddit, urging users to take advantage of the “once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago.” I hate to spoil their party, but the financial crisis was not caused by hedge funds.  

Admittedly, some hedge funds, or pooled investment funds, played a role, such as Sir Chris Hohn’s TCI who encouraged the Royal Bank of Scotland into its disastrous takeover of ABN Amro, for example. But the financial crisis was caused by a large nexus of factors: most notably by commercial banks offering high risk mortgage loans for individuals to buy houses, and then slicing, dicing and repackaging this debt to sell to buyers who were unaware of the risk.

Some hedge funds, such as John Paulson’s hedge fund, were even important players in calling out the crisis which became the 2008 crash, as excellently portrayed in “The Big Short” (2015). (Read our fantastic article on the lies behind the Big Short here)

Not only is Redditors’ anger misdirected, but their method is equally misjudged. Cheered on by Elon Musk, Redditors targeted their outrage at hedge funds that had large short positions against US companies such as the bricks and mortar game store GameStop. Musk urged Redditors to, “get shorty”, a position motivated by his hatred for the hedge funds that have shorted his own electric car company, Tesla, which has led to the decrease in value of his company.

This anger is misplaced, for short selling is not an evil conspiracy that sets about to destroy companies, but rather is a vital aspect of the efficient allocation of resources and thus the economy on the whole. Not only does short selling increase ‘liquidity’, the ease at which a stock is bought and sold, but also helps with ‘price discovery’, the process by which a stock finds its true value. Moreover, short sellers also act as vital market detectives, trawling through quarterly reports, reports on profits and revenues given by businesses 4 times a year, in order to sniff out the ‘bad apple’ companies. 

Wirecard, the German online payment company which committed large scale corporate fraud, and Enron, a former American energy company that hid massive debt, defrauding American families and gambling the pensions of their employees, share one thing in common: Short sellers found them out. The Securities and Exchange Commission often first learns about a fraud after it’s been exposed by a short-seller - call them the Sherlock Homes of the financial markets. This is why businessmen such as Elon Musk don’t like them. They ask the difficult questions and refuse to stomach the corporate optimism. 

Yet, as always, there are cases where shorting is the demon it has been made out to be. In his recent book, Barack Obama detailed of his frustration when a federal pension company was the target of a large short. That is however best solved through government regulation on which companies can and cannot be shorted, not an attempt to drive the hedge funds out of business. 

Worst still, Redditors were on the wrong side of the law. When a group of conspiring individuals trade stocks with the intent to manipulate the price, instead of simply making a profit, they sit firmly in the category of market manipulation. 

As the Securities and Exchange Commission, the US federal agency responsible for enforcing financial legislation, states: “a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.” Speaking about the GameStop short squeeze, Dr Elvis Jarnecic claims that, “if institutions did this to inflate prices …  they’d receive enormous fines in regards to manipulating the market.”  

Hence, rather than crony capitalism that favours the rich, the last few weeks have instead demonstrated the very opposite: ordinary Americans have gotten away with a deed that even corporate America wouldn’t muster. Robinhood, the retail trading platform of choice for the Redditors, whose mission is to, “Democratise finance for all" was totally right when they paused trading on GameStop shares due to the frenzy. After all, what is a democracy if it doesn’t uphold the law? 

Don’t get me wrong, Wall Street is by no means perfect. Over the years there have been cases where they have defrauded Americans and gambled livelihoods; they champion the very economic inequality that has inspired the confected outrage behind this backlash. But since when did two wrongs make a right? 

Redditors were successful in one respect: You’d have to have lived under a rock to miss the last few weeks of commentary on the matter. The ethics of wall street is now at the forefront of public debate. The doors of Wall Street, the world’s largest casino, have been thrown open to the little fish, but the sharks of finance have come out on top.

 Not only was the rage against the hedge funds missing the point, but in an attempt to curtail the ‘wall street criminals’, Redditors became the bandits themselves. A recent post on the reddit thread behind the movement, r/wallstreetbets, is titled: “Where do we go from here and who is going to help us?”. This frames the movement’s progress perfectly.  

We all enjoyed the ride, but since they were in the wrong from the very start, the Reddit revolution was always poised to fail. 

Freddie Cooke