What do Shaquille O’Neal, Occupy Wall Street, and internet pizza connoisseur Dave Portnoy have in common? Well, more than you might think. The GameStop saga, the growth of crypto and the recent proliferation of blank cheque corporations are all expressions of a much deeper cultural phenomenon bubbling underfoot.
In recent weeks, the financial markets have dramatically re-entered the popular discourse. Talk of short squeezes, Reddit revolutionaries and “holding the line” joyfully streamed through the fingertips of columnists far and wide. The internet meme machinery buzzed with activity, flooding news feeds with spicy stock market content. So, what exactly happened?
A collection of Reddit users, organized through a subreddit called r/WallStreetBets, launched bold, coordinated attacks against large hedge funds by buying up shares in failing public companies the funds had shorted. These mass buying events drove the share prices of these target firms skyward, forcing the institutional investors to retreat from their short positions at spectacular losses. GameStop saw its share price explode from $4 per share in July to almost $350 at the peak of the frenzy in late January. A very generous valuation for a moribund business model.
Predictably, the share price has since cratered, taking a lot of retail longs down with it. A return to normality? Not quite.
As the dust settled around GameStop, AMC, Nokia and other “meme stocks”, the winners and losers were revealed. Melvin Capital Management, one of the hedge funds with significant short interest in GME, did not disclose precisely how much it lost upon closing its position. It did lose enough that other prominent funds had to come to its rescue with an emergency cash infusion. At the same time, some Reddit traders reportedly pocketed millions at their expense.
To the r/WSB crowd, this represented a stunning victory. Against all odds, like the tale of David and Goliath, the band of largely young and inexperienced retail traders had overpowered the all-powerful titans of finance. A rare triumph of Main Street over Wall Street that seemed to signal a shift in the power balance between retail and institutional investors.
The incident bears a strange resemblance to Occupy Wall Street. A fresh reincarnation of the spirit of an anti-capitalist movement – this time, perhaps ironically, led by capitalists. The moment, in many ways, represents the cathartic release of a collective frustration with the decadent world of high finance that has been built up since the 2008 collapse.
As with the housing crisis, the price volatility ushered appeals for intervention. The phone rang at the SEC, but it was discount stock broker Robinhood that answered the call. Robinhood put trading restrictions on the volatile meme stocks, much to the dismay of investors. Evidently, many of the participants in the r/WSB revolt were Robinhood account-holders. Traders alleged that Robinhood was moving the goalposts in a desperate attempt to save the besieged hedge funds. The allegation, if true, would draw a contrast between Robinhood’s actions and its stated mission, which is to “democratize finance for all.”
Robinhood users were indignant. Barstool Sports founder and day trader Dave Portnoy took aim at Robinhood, claiming that its executives belong in prison. A class action suit was filed against the platform, and disgruntled users took to protesting at its Bay Area HQ.
Arguably, however, Robinhood has succeeded in its goal. Since 2018, it has more than doubled its user base from 6 million to over 13 million. The average account size of users of rival brokerages TD Ameritrade and Charles Schwab ranges from $100,000 to over $200,000. Robinhood’s average account size? Less than $5,000. This speaks to Robinhood’s success in increasing the accessibility of capital markets to regular people.
By the same token, its no-fee proposition stands to enable Reddit-style attacks. Public figures, including Elon Musk, have been accused of stoking the fire on social media. Musk sounded off on Twitter with a seemingly innocuous Tweet, simply reading “Gamestonk!!”. The name drop was apparently enough to move markets. Some have called for censorship, arguing that such posts amount to market manipulation, raising fascinating new questions at the intersection of securities law and the right of free expression. Musk has also become a prominent figure in the crypto space since his endorsement of Bitcoin helped its price rocket to record highs. Social media have thus become a vehicle for the growth of several disruptive trends.
Alexandria Ocasio-Cortez described the Reddit episode as “a weird collision of social forces and economic factors.” Weirder still is the connection to the wonderous world of SPACs.
Special purpose acquisition companies (SPACs, for short) are shell companies taken public by a group of investors through the standard initial public offering (IPO) process. However, unlike most public companies, they typically have no operations and purely serve as a vessel for merging with a private firm within a specified timeframe. A successful merger with a SPAC converts the target firm into a public entity, granting it access to public funds almost overnight.
This alternative means of going public is gaining popularity for its relative swiftness and economy. SPACs allow companies to sidestep having to procure a syndicate of underwriters, advisors, and lawyers in a complex process which can quickly become drawn out and expensive. Along with the option of direct listing, SPACs are cutting out the financiers and institutional investors that have long benefitted from the traditional IPO arrangement.
SPACs outraised IPOs in 2020 for the first time ever, with a 460% year-over-year increase in terms of proceeds raised. Further, many big names are now piling into the shell company craze, including former NBA player Shaquille O’Neal and rapper Jay-Z. The trend is expected to continue.
This constellation of developments is part of a broader cultural shift. Legacy institutions are being disrupted on multiple fronts. From the counterculture movement of the ‘60s, to Occupy Wall Street in the new century, to Robinhood, crypto, celeb-sponsored Reddit raids and SPACs today, a clear anti-establishment through line can be drawn. However, unlike the disruptive movements of yore, the present moment takes on a distinctly capitalist flavour.
Interesting questions remain. Should online speech be limited in the name of market stability? Do the benefits of democratizing capital markets outweigh the costs? Should retail traders be protected from themselves? Has the efficient market hypothesis been invalidated? Is the meme stock and its attendant volatility here to stay?
As the general public and regulators struggle to keep up with these fast-evolving trends, the new questions they raise promise to be met, in time, with still more interesting answers.
