Why GameStop reveals the flaws of big finance

February 3, 2021

The financial establishment has been treating the stock market like a casino for decades, calling for free markets and deregulation. But the GameStop saga has forced them to show their true colours: they want a system they can control.

GameStop, a high street games retailer that employs approximately 14,000 full-time and 20,000 more part-time staff, across 5,500 stores in multiple countries, has found itself in the centre of a financial storm. A few months ago—in the midst of a global pandemic, with sharp rises in unemployment and many struggling to make ends meet—Wall Street hedge funds Melvin Capital and Citron decided to speculate on the demise of GameStop and the loss of those jobs. 

GameStop’s stock price was hovering around $4 (£2.90) when the hedge funds placed aggressive bets that GameStop’s stock price would drop. But over the next few months, large numbers of users of the Reddit forum WallStreetBets gradually banded together to buy up the stock, slowly pushing the price up. The hedge funds bet the price would be lower, and the Reddit traders bet it would be higher.

Last week, a storm of meme-fuelled hype around the stock on Reddit and social media—especially a tongue-in-cheek tweet from Elon Musk— drew in a critical mass of investors, which sent the stock price skyrocketing. The price peaked at $500 (£364) and held around $300 (£233), before crashing to just $90 (£66) by the time the markets closed yesterday.

When the stock was flying high, major financial news sites published elitist articles decrying the actions of the WallStreetBets traders as reckless and naive, appealing to regulators to shut them down. But there’s a deafening silence about the morality of the aggressive bets that the hedge funds made against the GameStop stock price. The sudden calls for regulators to step in and end the ‘market manipulation’ by small traders on Reddit betrays a fundamental hypocrisy at the heart of the financial establishment: they only want a free market as long as they take the upside.

But it’s not all about the money. For many of the small traders, buying the GameStop stock was much more than a ‘you only live once’ bet. There’s also a deep sense of anger at the financial establishment, and a desire to be a part of a wider movement taking the power back. More than 10 years on from the global financial crisis, and in the midst of a global pandemic and sky-high inequality, big finance is still relentlessly chasing profits regardless of the social cost. The chance for ordinary people to make trades at the expense of big firms on Wall Street made this situation unprecedented: it felt like getting payback for all the economic hardship wrought by financial firms.

Unfortunately, placing bets on the stock market has little effect on the underlying power structures: it’s hard to say just how much of GameStop’s price rise was really driven by small traders, and how much was other large financial firms and larger investors showing up to speculate on the same side of the bet. Lots of retail investors who arrived late to the party are going to be left holding the bag yet again. The fight for a fairer financial system will be won not by playing the game, but rewriting the rules.

Senator Elizabeth Warren commented that the US Securities and Exchange Commission needs to pass new legislation to prevent hedge funds from playing the stock market to their advantage: “With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy. For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price. It’s long past time for the SEC and other financial regulators to wake up and do their jobs.“

We are long, long overdue for governments and financial regulators to step up and help the people who had their lives torn apart by the recklessness of financial elites. After the dust has settled around GameStop, policymakers across governments, central banks and regulators will be facing an important choice. They can side with the hedge funds by suppressing the newfound market influence of small traders, and seeking to restore business as usual in the stock markets. Or they could step up and counter the excessive power of the financial establishment, and build a genuinely fairer, more democratic and sustainable financial system.