It's All Rigged
As of January 10, nine brokerages had set the one-year target stock price for GameStop at about $10.
But that’s not where it would stay—at least for a while. It climbed in price because a subreddit, r/WallStreetBets, engineered a short squeeze.
That kicked off a wild ride, revealing many things not just about how digital technologies are transforming our world, but also about how they are not. It was yet another stark demonstration that technology is not simply a tool—neutral on all possible outcomes, good or bad—but something more dynamic, messy and complicated. It’s a complex system where the workings of both the technology and our society, and crucially, how they interact with each other matter greatly.
This is how the squeeze worked: A few large hedge funds had “shorted” GameStop. That means that they had borrowed the stock, with the intention of returning it when the share price moved lower, as they expected it would, leaving them with a profit. Obviously, this works only if the future price of the stock is indeed lower. If the share price rises, the hedge funds would have to buy the stock at the new, higher price, leading to losses. Investors on r/WallStreetBets had noticed that this particular short position was especially vulnerable because a large portion of its existing shares was tied up in the short betting. They explained to others in the forum that if the price went up and up, the hedge funds would eventually be forced to cover those short positions by purchasing the stock back at a much higher price—from them.
They started buying. The stock started rising.
The attempted squeeze and the ensuing rise in GameStop’s stock price was a media sensation.
On January 25, The New York Times wrote: “In an epic contest between Wall Street traders who bet against stocks and legions of small-scale investors, the small guys are winning.”
On January 27, just two days later, the stock hit $347. A writer for Bloomberg said that this was an example of the internet world affecting reality. She compared the small-scale investors on Reddit to people into live-action role playing, and said this market LARPing could “lead to changes in the real world.” She contrasted the “rational” pros that operate according to “fundamentals” with the “tribal dynamics” of the “feelings-fueled investors.”
Self-organized groups have been using the web to act on the physical world for a while. The tech companies that enable this behavior are themselves old. Facebook turned 17 on February 4. Google is already 22, Reddit is 15, and Apple’s iPhone—which ushered in the era of smartphones—is 13. We’ve had many years to think smarter about what digital connectivity means. And yet, we still face this idea that the internet is a game, that the virtual world is something distinct from the real one. This condescension is even embedded in the phrase IRL—“in real life,” meaning not online.
But the internet isn’t a game. It’s real. And it’s not just a neutral mirror that passively reflects society. One hears that notion from tech elites who’d like to deflect blame from their own creations, which have both empowered and enriched them. “It’s just a tool,” they say. This same mentality is what made Mark Zuckerberg say that it was a “pretty crazy idea” that Facebook had anything to do with Donald Trump’s election—a statement he had to walk back, in part, because it contradicted everything that Facebook usually claims: that its software matters; that it influences people; that it changes, rather than merely reflects, the world.
On January 28, Robinhood and other major trading platforms abruptly announced that they had restricted transactions for GameStop—and a few other stocks that redditors were also trying to squeeze. All of a sudden, people could not open a new position to purchase those stocks. Robinhood users weren’t forced to sell their existing shares, but they could not buy more than a single GameStop stock and five option contracts (which give the bearer the right to buy or sell an underlying stock in the future).
Robinhood is particularly important to this saga because it was the platform of choice for r/WallStreetBets. It drove the retail (meaning small investors rather than big institutions) trade boom because individuals could buy and sell as much as they wanted without a fee. But as with social media, Robinhood’s users were about to find out that the intermediary platform’s business model mattered greatly.
Unlike traditional brokerages, which charge a fee for buying and selling, Robinhood offers these seemingly free trades because it makes its money in large part by selling the trades to big buyers, many of them other hedge funds. It’s those players that will make the real money—and in turn pay Robinhood for the privilege.
The restrictions came because, under its business model, Robinhood could not put up the kind of capital required for all of these trades in the clearinghouses where they are eventually settled, the company wrote in a blog post. So it wasn’t that Robinhood had an interest in kneecapping the short squeeze. Rather, it was never a suitable platform for engineering a squeeze of this scale—based on “free” trades by retail investors precisely because those investors were never its true customers.
These consequences do not necessarily flow from any particular malice from the company or its employees. Instead, it’s always important to pay attention to a company’s incentives, and especially how it makes money. This is especially crucial with digital platforms, where the real mechanisms aren’t as easily visible. If a retailer sells shoes, for example, you expect them to make money … selling shoes. For many digital platforms, though, the users are not the actual customers, and that has profound consequences.
These dynamics play out across many digital platforms. Similar to how Robinhood makes money not from individual traders, who are its users, but from its hedge-fund customers, Facebook, Twitter, YouTube, Reddit, and the rest make money by selling our attention to advertisers or anyone looking to influence people. This business model also fuels surveillance because paid influence operations work better if they have more data to improve their targeting; data allow them to better find ways to “engage” us. And if there is one thing we know about a social species like humans, it is that in-group versus out-group dynamics (us versus them) are very engaging. Similarly, novelty and misinformation are often attractive, and the truth boring and unengaging. Thus, even though the engineers at these companies don’t set out to amplify tribalism and polarization, the algorithms they let loose on us inevitably do, as a corollary of their optimization target.
This complex interplay between business models, technology, and existing power structures in our society means that we have to move beyond simple narratives: The underdog is winning! Technology is liberating us! The underdog has lost! It must be technology’s fault! To understand the Robinhood and GameStop episode, it is also essential to understand how Wall Street operates, and how the fortunes of big corporations and their executives have become intertwined with it. On February 2, GameStop closed at $90, less than 20 percent of its all-time high, which it had reached just a few days earlier. Like many internet stories, the narrative may start with the “little guy” winning—David against Goliath—but they rarely end that way. The little guy loses, not because he is irrational and too emotional, but because of his relative power in society.
Similarly, Facebook was first celebrated for empowering dissidents during the Arab Spring, but just a few years later it was a key tool in helping Donald Trump win the presidency—and then, later, in clipping his wings, when it joined with other major social-media companies to deplatform him following the insurrection at the Capitol. The reality is that Facebook and Twitter and YouTube are not for or against the little guy: They make money with a business model that requires optimizing for engagement through surveillance. That explains a lot more than the “for or against” narrative. As historian Melvin Kranzberg’s famous aphorism goes: “Technology is neither good nor bad; nor is it neutral.”
It’s also important to remember that platforms are never all there is to these stories. For example, the United Nations has taken Facebook to task for amplifying hate speech that fueled the ethnic cleansing of the Rohingya in Myanmar, but Myanmar’s government had already been fueling ethnic divisions. Similarly, decades of U.S. institutions slowly but surely failing, becoming less responsive and less accountable toward the interests of ordinary people, allowed someone like Trump to win the presidency.
In 2021, one must be quite oblivious to argue that unyielding adherence to “fundamentals” is what allows certain companies to do spectacularly well on Wall Street, and that people attempting to engineer a short squeeze are merely irrational or dominated by feelings. Recent history has made a mockery of Wall Street’s pretensions to superior rationality. In the lead-up to the 2008 crash, under-regulated, cash-rich Wall Street pros made enormous bets using complex and indefensible formulas and clever tricks, making themselves richer while doing so. Those bets and formulas were not rational, but they were convenient as long as one could pretend they made sense. When it all finally came tumbling down, after a large investment bank went bankrupt, the whole financial sector was bailed out with taxpayer money, because the intertwined nature of the industry and the size of their massive bets meant they could drag the whole global economy down with them.
What was the consequence for these reckless, greedy, and irresponsible actions that could in no way be defended as rational investments based on “fundamentals”? A few people may have lost their massive bonuses for a short time, but no Wall Street executive went to jail. Just one year after being bailed out, they were back in business, handing out $20 billion in bonuses, as unemployment was soaring. However, for the millions of families without extensive wealth buffers, the effects of that crash have been terrible—not just a year of small or no bonuses—and will likely linger their whole lives. What one side has is not superior rationality, but superior power.
The pattern is persistent, and it’s not even concealed. The higher echelons of the corporate world play together with the government and Wall Street to enrich themselves. For example, major US airlines have spent nearly all its extra cash on stock buybacks for the past decade, thereby inflating its stock price—and thus executive pay, which is often tied to stock price—and the stock market. And when the tough times came with the pandemic? The industry got a $25 billion bailout from the government, as one does. Boeing, too, spent most of its cash on stock buybacks, and its CEO was fired with a $62 million exit package not long after the Boeing 737 Max crisis—which resulted in two crashes and 346 dead. A 2013 report found that the average “golden parachute” for the top-paid CEO who was fired was $47.7 million. On it goes.
The social contract is broken, and that’s why the game feels rigged. Right now, especially in countries like the United States, many of the largest, most profitable companies play the legal-tax-evasion game to the point that they are sitting on hundreds of billions of dollars in cash. (Apple alone has cash reserves that hover around $200 billion. Similarly, both Microsoft and Alphabet/Google have more than $100 billion in their cash pile.) These stockpiles are humongous and the companies are not productively investing them—by building something, or by paying people—so the money all goes back into the stock market. When there is such concentrated wealth, many assets—from stocks to Picasso paintings—appreciate. Such disproportionate investment in speculative or nonproductive assets, coupled with the lack of investment in things that make society work better for more people, like education and health care, further break the social contract.
When things are so unequal, and power so concentrated on one side, moralizing takes about whether r/WallStreetBets is a mob ring hollow. What makes them “a mob” for trying to profit together, while Davos is a distinguished gathering? Before digital technologies, it was mostly the wealthy and the connected who could coordinate and conspire to manipulate markets. Disruption certainly came with the internet, which made it easy for anyone to find a group to communicate and coordinate with. But the internet isn’t a pony that empowers only the nice groups we like (Arab Spring dissidents, but not white supremacists), nor does it magically and instantaneously alter the power dynamics in society (so the underdog can suddenly be assured of a Hollywood ending).
On February 4, GameStop fell to $53. That day, Treasury Secretary Janet Yellen went on Good Morning America and said she was meeting with regulators to discuss whether they needed to take “further action” to protect the investors—presumably including the investors at r/WallStreetBets, many of whom lost a lot of money. Did they take hope from her statements? It’s hard to know, in part because Yellen’s financial forms show that she made about $7 million in two years from speaking fees, much of it from talks given to banks and hedge funds, including Citadel, the very hedge fund that purchases trade information from Robinhood. It paid her $810,000 for a few speeches. Similarly, Ben Bernanke—former chair of the Federal Reserve—is now on Citadel’s payroll as a senior adviser. This may not preclude Yellen from taking positive steps, but you also can’t blame retail investors for wondering if the game is rigged against them, when there is such a fast revolving door between the government, the highest tiers of corporate America, and Wall Street.
On February 7, during the Super Bowl, Reddit used the r/WallStreetBets incident for a feel-good ad. “Powerful things happen when people rally around something they really care about. And there’s a place for that. It’s called Reddit,” the ad flashed. It went on to celebrate the underdog: “One thing we learned from our communities last week is that underdogs can accomplish just about anything when we come together around a common idea.” It was all warm and fuzzy.
Reddit may feel as if the ad cheers on the underdogs who congregated on its platform, but some of them lost real money. In contrast, many big players likely made a lot of money from the GameStop mess. A single hedge fund reported making $700 million. The big players are preparing to make money by surveilling such future attempts as well: Quiver Quantitative, a firm that monitors platforms like Reddit, said that it has seen “a surge of interest in its product from hedge funds and other institutional investors in the past two weeks.” The pseudonymous boards of r/WallStreetBets may well have harbored a lot of professional investors, who saw an opportunity to “pump and dump” the stocks.
GameStop is currently hovering around $50 a share, about a tenth of its peak.