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Reddit day traders tried to beat Wall Street at its own game to prove the system was targeting.
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Instead, brokers excluded them and kept their investments in a fraudulent mortgage, while some hedge funds still won big.
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According to experts, Wall Street’s reaction showed how stacked the deck is against small investors.
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Keith Gill, the day trader and member of the Reddit group WallStreetBets, who is widely acknowledged to have ignited the recent GameStop trading frenzy, claims in late January that he turned his $ 54,000 investment into a $ 48 million fortune .
Days later, it was cut by more than half to $ 22 million, and regulators instituted Gill and investigated him for possible violations.
Many retail investors fared much worse. One Robinhood user lost $ 70,000 in savings and considered suicide. Another, Alexander Kearns, has.
GameStop’s share, which peaked at more than $ 480, fell to about $ 52 from Friday.
Before the rollercoaster jumped off the track, however, one hedge fund walked away with a profit of $ 700 million. The brokerage app Robinhood has raised billions of new financing after being forced to restrict its users from buying shares, and trading giant Citadel has likely earned a hefty amount from the increased market volatility.
While the dust has not settled for a long time, and some Wall Street businesses have lost a lot, it does not seem that David’s victory over Goliath is now most likely.
It also produced a compelling narrative: an army of retail investors – without deep pockets, sophisticated trading algorithms, own market data or other trading instruments – working together to beat powerful, corrupt financial institutions into their own game.
Eventually, it appears that Wall Street and other big money investors have ended up at the top, and experts, at least those outside the industry, say this is the result that further proves how the system is being applied.
Insider spoke to three financial market experts – none of whom work for traditional financial services companies. They said a lot of work needs to be done to make the markets work for small investors again, and, just as importantly, to reassure the public that the markets can do it.
“Aimed to benefit the great”
“The whole business is basically a dynamic of power … it’s focused on favoring the big over the small,” Garphil Julien, a research fellow at the Open Markets Institute’s antimonopoly think tank, told Insider. “Those with huge amounts of capital, huge amounts of money, will use their power to basically get what they want, and when they get what they want, someone else is going to lose,” he said.
He is not alone in judging.
According to a recent CNBC poll, 57% of Americans view the stock market record only as a reflection of how companies and the rich are doing, not the rest of the country. This also applies to financial elites and Republicans, both historical defenders of the free markets.
“Is the market really fair to individual investors? Is it really competitive? What we are seeing is that it is not,” Julien said.
As former Wall Street analyst Alexis Goldstein recently put it in an opinion for The New York Times: ‘Wall Street’s edge over retail traders remains, as always, structural’, and even as a bunch of Redditors work together, ‘ is the house still winning. “But, she argues,” rather than gamble on the dubious promise that more Americans will gain access to the casino, it’s time to rewrite the rules to ensure the house does not always win. “
Julien said this means adding more consumer protections and curbing the monopolization of different segments of the financial services industry. For example, he pointed to brokerage apps, such as the E * TRADE owned by Morgan Stanley and TD Ameritrade, owned by Charles Schwab.
Make money by ‘making money’
Another problem underlying the GameStop saga is that too many Wall Street businesses have ended up with companies that are inherently designed to extract as much money as possible for their own profit from the financial system, rather than helping allocate it to customs that will help the general economy. .
Amid last month’s trade rush, the markets were finally fairly resilient, but that does not mean they are working in ways that protect smaller investors who have more to lose.
“There will be a temptation to say … the market is not broken, everything is fine,” Barbara Roper, director of investor protection at the Consumer Federation of America, told Insider. “While it’s true that the market has not yet broken down, I do not think it follows that all is well.”
Roper said it is good to focus on improving transparency and accountability around practices that may include conflicts of interest, such as payment for order flows, about which Robinhood and Citadel both come under scrutiny, but that the issue is also much more fundamental and widespread.
Read more: Robinhood earns hundreds of millions by selling customer orders. The business model is about to focus.
“The financial services industry itself has separated itself a bit from the sower and less profitable work to help capital to the best use to support the productive economy, and has been making most of its money to make money for some time,” he said. Roper said.
“Financial companies earn all their money to secure everything under the sun,” she said. “They have found a way that it is really profitable, and so they are striving for the profits, even though the niche is too full.”
But the problem ‘was at the heart of the last financial crisis, and we did not solve it there’, Roper said, referring to the 2008 financial crisis.
Since then, there have been almost crises and the problems have only gotten worse.
Robinhood itself has been criticized – and fined $ 65 million by the Securities and Exchange Commission – over high-frequency trading, a controversial practice of using powerful software to execute large transactions in a second, enabling businesses to make money earn from short-term changes in the price of shares. Wall Street banks even evade regulations on derivatives trading – the same risky behavior that caused the crisis in 2008 – according to the financial blog Wall Street On Parade.
Roper said she also will not see dangerous Wall Street business models anytime soon.
‘If we did not do it when Wall Street literally brought the world economy to the brink of collapse, I do not think we are going to do it now because some people on Reddit briefly woke up and caused chaos in the markets for a few weeks, ‘she said. “I think I’m just as cynical as the people at WallStreetBets.”
“Wider public outrage”
Part of Americans’ frustration with the current financial system is that it’s become so complicated that only Wall Street insiders really know how everything works, something the industry uses to its advantage to blame in situations like GameStop. avoid.
“This is another episode similar to those who earlier in the public felt that several things were wrong here – not really knowing what exactly was wrong, but just feeling like something was not working,” said Graham Steele, senior fellow at the American Economic Liberties Project. , Insider said.
‘It’s just a common notion that a system in which this kind of scenario can happen just does not fundamentally work for the public and that it is’ knee-jerk’ or something else, but they know something is wrong. “
Steele also said that the growing inequality, failures of the pandemic and the polarization surrounding the election reinforce the GameStop rage: “It feels like you’re putting a new financial episode on top of other, broader public outrage.”
This is also evident from the voices from across the political spectrum that Wall Street has criticized in recent weeks: progressive Democrats such as Representative Alexandria Ocasio-Cortez and Senator Elizabeth Warren; far-right Republicans like Senator Ted Cruz; and technology investors such as Elon Musk and Mark Cuban.
But this is where their agreement ends, with Democrats mostly preferring government intervention, and Republicans usually strive for more transparency and then let the markets figure out the rest.
‘As for the Silicon Valley people,’ Steele said, ‘they portray themselves as a kind of populist, but many of them have their own kind of financial interests at stake here. Many of their solutions are like ‘do not’ not use the app, use the app I invested in. ‘
“I just do not see Elizabeth Warren going there to pump up someone else’s trading app because a venture capitalist said ‘this is the right thing to do’, ‘he added.
Elon Musk, for example, has been picking up cryptocurrencies like Dogecoin over the past few weeks.
Ultimately, all three experts agreed that improving markets more equitably and in line with the health of the wider economy, would require reforms that went far beyond the financial services industry.
“To fix the system, a whole range of policy solutions are needed that manage the spectrum from financial regulation to tax policy to the way we structure the retirement system to how we provide healthcare to people,” Steele said.
Read more: The SEC is watching the GameStop trade frenzy. Therefore, lawyers and former regulators say it will be difficult to restrict the market.
Read the original article on Business Insider