To get its head around Reddit, Wall Street will have to stop calling it 'dumb money'

Mark My Words #5

Tomorrow, our normal Borkowski Trends newsletter will come out as usual. In the mean time, we thought we’d send you some thoughts directly from founder Mark Borkowski. Here’s ‘Mark My Words’.

In the past week, individual traders have shown that they too can use a tactic from the hedge funds’ arsenal, and put on the ‘short squeeze’—on Wall Street itself.

But if this is going to be more than a story about David v. Goliath—the big, tech-savvy investment giants v. the sparky, individual traders of the internet—Wall Street will first need to look outside of its bubble and see the world through the eyes of its new opponent.

This is the story: an online community of traders—many of whom, as the New York Times points out, have opened brokerage accounts only after losing other sources of income due to the pandemic—have realised that, working together, they can drive up prices of written-off stocks sharply enough to screw over the ambulance-chasers who have massively shorted the likes of AMC and Blackberry. Enter GameStop (GME). Since a group of traders on the foul-mouthed Reddit group WallStreetBets realised the collective impact they could have by rallying around a single stock, they’ve driven up its market value by over $22 billion in a couple of days.

One fund, Melvin Capital, drew the ire of the redditors when they disclosed they had shorted GameStop. The glee of the mob took over. GameStop shares have soared 1,700 percent as millions of individual investors rallied around it. Melvin Capital’s fund was down 30 percent in the first weeks of January, and they had to seek an injection from bigger funds to the tune of $2.75 billion.

On Wednesday, TD Ameritrade put the halt on the trading of GameStop, AMC, and others, citing ‘unprecedented market conditions’. But this weather-report language doesn’t quite capture it. If the bosses of Wall Street are going to get to grips with what’s really happening here, they need to see this for what it is: a coordinated strike against the establishment by those who feel cut off from the bonanza profits of the global elite. 

No doubt, the powers-that-be will be swift to shut down financial reddit, though one security lawyer, Andrew Calamari, told the New York Times that ‘simply garnering enthusiasm for people to go out and push the price up’ is, technically, not illegal. The big hedge funds might have a hard time labelling this as aberrant behaviour. It’s really the redistribution of collusion away from the power of the insider to the power of the mob.

The establishment—including centrist liberals—will coalesce against this behaviour, arguing that Wall Street needs to be chastened through mainstream means (legislation) not through redistributive vigilantism. Remember, these people are already shaking in their boots since some of them will recently had to go into the bunker of the Capitol building to avoid death by mob. Anyone who’s already worried about the internet platforms that rouse people against long-held norms and procedures may very well see WallStreetBets as the next Parler, and its readers as financial Proud Boys.

To be sure, WallStreetBets is a chaos which circulates many of the same energies of anti-establishment sentiment, meme culture, self-effacing autism, and a call-to-arms language filtered through some irony (but how much?) as the militant alt-right.  ‘Rally the troops, my brothers, for the war could be over very soon,’ a Reddit trader wrote last week. ‘You control the power, GME is not going to the moon, but to the edge of the fucking observable universe.’ This is an obsessive echo chamber that idolises the 1 percent (the leading photo on WallStreetBets is a meme version of Leonardo di Caprio’s character from the Wolf of Wall Street) and who want to be them as much as—if not more—than they want to change the system. Their posts are thus animated by a weird frenzy of imitation, loathing, envy, glee, and not a little schadenfreude. ‘There’s a catharsis to actually making money off their pain a little bit,’ said a pastor from California, who has made $1,700 from GME (almost as much as a stimulus check!) and who has put most of it to buying a new mattress.

Wall Street needs to wake up and smell the coffee. There is appetite out there not just for reform, but for punishment of those who are seen to be exploiters. There are two narratives here. On the one hand, we are seeing an increase in various forms of social isolation giving rise to a herd of ‘apocalyptically minded’ internet warriors.

On the other, there is a new class of scrappy individuals who, having lost their jobs in restaurants or entertainment, are now symbolically reviving a vestige of a Brick & Mortar economy that is all but a goner. Without any form of support from a denialist political elite, they have used what means they can to claim a share of the bonanza pot.

The ironies are unavoidable. Now that Mervin is asking for a bail out, I assume the burden of proof will fall on them to demonstrate why, when, last year, they were the beneficiary of ‘unprecedented market conditions’, it was something other than what’s happening now. (Where you stand, of course, depends on where you sit.)  For now, if I were a banker, regulator, politician, day-trader, small business owner, senator, clergyman, internet user, or private citizen, I would be watching carefully to see what the next move is in this war between the nerds who control the economy and the nerds who don’t.