Gamestop, reddit, Musk and why in Wall Street, the house always wins

Reblogged from my other site….

So there’s been a bit of a fiasco over the fact some hedge funds have been trying to profit from a likely fall in the share price in Gamestop, here’s a nice summary of events from a neutral prospective. And a bunch of redditors from wall street bets (a hang out of Trump supporting amateur investors known for doing catastrophically stupid things with their money), along with Elon Musk, are angry with the hedge funds for short selling, which they say is unethical. Seriously?

So its okay for Elon to make outlandish claims (something that has gotten him into serious hot water) and jack up the stock price of his company. And its also okay for this lot on reddit to manipulate a stockprice (white privilege and all). But somehow its not okay to try and counter balance this by profiting when a stock drops in value. Short selling, by bringing down an overly inflated stock price can discourage investors from pouring money into a company whose stock price is ultimately doomed to collapse (Theranos, Carrillion, Enron, the CDO’s of the financial crisis all being good examples where short sellers played a role in popping a dangerous bubble). This is a little more hypocrisy than I’m willing to swallow.

Now I can understand why Bernie Sanders or AOC might not be fans of the hedge funds. They, after all, are sceptical of unregulated free markets. But if you are on the political right, such as Ted Cruz (and most of the democrats!), I’m sorry you can’t do that. Hedge funds and short selling are not a perversion of the market capitalist system, they are a natural consequence of it and the neo-liberal free market policies governments have pursued over the last few decades. If you don’t like what they are doing, you obviously need to re-evaluate where you sit on the political spectrum. Either that, or dive in to the pit of snakes that you have helped create.

Frankly its a bit like getting a cat and then complaining when he starts playing with live mice or bring dead birds inside and leaving them around the house. The cat isn’t the problem. He’s doing just what a cat’s supposed to do. The problem is you clearly don’t know a lot about cats and should have done your research before getting one.

I know one or two people who work in finance and suffice to say there is a lot of disinformation here that needs setting straight. Firstly, ignore anything the hedge funds say about how they’ve lost money. How do you know a hedge fund manager is lying? Are his lips moving? Anything they say is going to be be a distraction intended to get others (the media, the redditors, regulators, etc.) to do their bidding. In truth, they’ve probably made a killing out of this and its going to be the reddit brigade who are going to get hosed.

What puts the hedge in hedge funds is that they will typically bet both ways on any stock. That is to say, for every $10 they invest, they will have bet say $4.5 on the stock rising and $5.5 on it falling. The point of this strategy (and obviously this is a vast oversimplification of the process) is that when they get it wrong, they lose small. But when they get it right they can win big.

In all likelihood, the hedge funds either unwound their short position at the first sign of trouble (or they are simply paying the costs of sitting on it, given that the stock is all but guaranteed to now collapse) and began speculating on the stock price rising, which would more than cancel out their losses and could net them huge profits. This is why the aforementioned lefties don’t like wall street. Its like a Las Vegas casino. Occasionally yes the punters get lucky, but in the end the house always wins. Because its a system that favours those with the cash and the credit to buy their way out of trouble.

Then there is the small matter of insider trading and stock manipulation. Yes its true that hedge funds have been accused of doing this themselves (we’ll get to that), but two wrongs don’t make a right. Furthermore, its kind of a bad idea to go and commit such crimes on the internet, on an open forum, with the SEC and the FBI watching. Indeed one has to consider whether it was some hedge fund traders with ghost accounts, aware of how dumb this wallstreets bets lot are, who put them up to this in the first place (and are likely busy laughing their asses off at how these morons have helped them make a fortune).

Which brings up to the position of Robinhood, the trading platform used by many of these amateur traders, who stopped all trades of Gamestop shares once they knew what was going on. This is not a surprise. They are the professionals who execute the trades (and thus are expected to be the grown ups in the room), they are the ones who could lose their license and potentially get sued or go to jail over this.

Its like hiring an Uber and while in the car announcing over social media that you are going to rob a bank and live stream it. Unsurprisingly the Uber driver is likely to either stop the car and order you to get out, stop and run away or drive to the nearest police station and let them sort the matter out (I used to live opposite a police station in Glasgow and this sort of thing used to happen occasionally with late night buses or taxis, hence why I didn’t have a TV in the flat, if I wanted to see police camera action, all I needed to do was look out my window). You can’t really be angry with him for not wanting to be involved in a crime.

The reality, or so I’m told, is that most traders are honest and stick to the rules (which sort of contradicts the right wing talking point that the slightest hint of regulation and they’ll all move to Dubai and learn to live without Bollinger). After all why would you want to risk a lucrative well paid career? But the problem is that the markets are a bit of a wild west. There’s a lot of people who get jobs or promotions for all the wrong reasons (your typical frat/public school boy whose family connections gets him a job) and quickly find themselves out of their depth. There’s also lack of regulation and a lack of enforcement of those regulations. Hence those who cheat all to often get away with it.

And inevitably those that do get caught, more often by their employer rather than the authorities, they are often not punished severely. Either they are shielded by their status, or the government worries about scaring off investors, or the company doesn’t something this embarrassing to become public. So the whole thing gets swept under the carpet (at worst a slap on the wrist fine or a reprimand). Consider how after the financial crisis only one banker went to jail…who just happened to be one of the few non-whites involved.

So tighter regulations would be part of the solution. Most notably the fact that certain financial instruments such as derivatives aren’t adequately regulated. A financial transaction tax would also help (as this limits the amount of profit per trade it would make certain types of trades, including some short selling plays, unprofitable). As would making company’s financially responsible for any outlandish promises they make (If a CEO promises to buy back stock at a certain price, as Musk did, well guess what now you have to do it, even if it bankrupt’s you).

Perhaps more importantly, back those regulations up with some enforcement. The police will devote vast resources and thousands of hours of police time just to catch some low level criminal, yet they won’t lift a finger to go after white collar criminals who steal billions and whose crimes can directly impact many millions of people. I’d argue a minimum sentence of say 10 years per million stolen/defrauded (in a real prison, not one of the nice soft prisons they normally send rich white collar criminals too) and a fine of double the amount they stole (which they can’t write off, hence it will follow them around for the rest of their days, even their rich friends or relatives won’t be able to buy them out of this one).

If there’s one thing the rich fear more than anything else, its ending up poor (or stuck in a jail with lots of poor people), as they know full well how catastrophic their policies have been to those at the bottom of the economic tree. You won’t have too catch too many of them to scare the rest straight.

But in the absence of such measures, all that this Gamestop business is going to achieve is a lot of hot air and yet another scenario where the rich will just get richer.

About daryan12

Engineer, expertise: Energy, Sustainablity, Computer Aided Engineering, Renewables technology
This entry was posted in crime, economics, news, politics, power, scams, technology and tagged , , , , . Bookmark the permalink.

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