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The Day The Myth Of The "Free Market" Died

A Joke on Reddit spiraled into a trading frenzy that saw the stock value of video game retail franchise Game Stop rise more than 1700%. The resulting loss by many hedge funds (who had predicted and invested in the demise of the retailer) lead to unprecedented actions on the part of the SEC and the Fed to protect them and curtail "free" investment in the stock market.

Hedge Funds vs. Redditors?

In order to even understand why Wall Street was bothered by a bunch of redditors (users of reddit, as they're referred to colloquially) investing in a company whose name many hadn't heard of in at least ten years, one has to understand what a "hedge fund" does, and more specifically, what it means to "short a stock."

Hedge funds invest in an assortment of stocks in order to spread out their potential for profit. In doing so, they can take on a lot of risk, which in order to offset they invest in a range of risky to safer investments to theoretically balance out a portfolio - to 'hedge their bets.' In their bag of tools is the ability to invest not only in a company's success (as one typically does), but also even in companies/industries going under - this is called 'shorting' the stock. Is investing in stocks gambling? One would argue that making investments based on market assumptions is perhaps a more informed process than gambling on sports, or is perhaps a more stable/predictable playing field on which to make assumptions, but is it? Can you truly predict that a company will do well in a certain economic climate more accurately than you can predict that the Lakers will beat the Washington Wizards on any given night? At least it's debatable. Still, it's much higher stakes, and even more akin to gambling to be able to invest in either a stock's rise or fall, or so it would follow logically. The ability to short stocks puts traders in the unique position of being able to succeed on the failure of others, but also fail 'doubly' if you're wrong about that failure coming to fruition. Thus shorting is reserved for stocks/a company that one has to be fairly certain is circling the drain.

Game Stop, for example, is a big box retailer that sells video games that are now increasingly digital products available online, and video game systems that are also increasingly available online - another victim of the recent 'Amazon/online shopping craze,' coupled with the global pandemic.

The argument would go that betting on Game Stop going under wasn't so much a "gamble" as much as it was vultures circling the dead carcass of their next meal. So they 'hedged' against it at great volume; many hedge funds 'gambled' that Game Stop would steadily go under. This is how they make money, by using "financial instruments" to take 'offsetting positions in derivatives that correspond to their existing positions.' In short, they came to need Game Stop to steadily go under.

Enter reddit: in part a prank to support a business beloved by many (even if notoriously obsolete) and in part a deliberate middle finger to the speculators/'hedgers'/Wall Street-types, redditors hatched a plan.

The middle finger aspect was no small part; there was a palpable sense that they would be affecting those on wall street who trade in the demise of not just obsolete businesses from our nostalgic past like Game Stop, but also "Main Street, USA" at-large, and entire industries that are strengthened or weakened at their whim. Ayn Rand's Masters of the Universe are more than just fictional boogeymen (or heroes as she intended for them to be viewed as, somehow), and anyone who has seen stock markets soar in recent years while the general standard of living around them has plummeted can attest to the malevolence and greed of "Wall Street." This is one of those rare sentiments that is universal across the political spectrum (barring much of the center, perhaps).

The Result

The result of this reddit-inspired pushback? Game Stop's stock rose to unprecedented levels (more than $10 billion on Wednesday alone), and the many hedge funds who had 'shorted' the company? Down billions. The vast majority of the outside investors that inflated the price did so using the commonly-used trading app Robin Hood, which touts itself as enabling day trading by everyone & removing it from the clutches of the wealthy, plugged in 'elite' that traditionally invested in stocks and bonds.

Reddit activity trickled to social media at-large and it soon became a phenomenon with #GME and #Gamestop spreading across the internet like a wildfire - Wall Street seemed to be genuinely confused as to how to move forward. While 'the market' is clearly highly regulated, the philosophy of a 'free market' has always been core to the principles of capitalism, and a kind of sacrosanct concept that is invoked whenever any kind of regulation is proposed to protect stakeholders/the public from an overly risky, free-wheeling financial sector. Would the architects (and beneficiaries) of these "financial instrument" machinations be held sway by the same forces that they used to handcuff regulators for decades?

Apparently Not.

The Fallout

As Thursday's markets opened, it was clear something was to be done and aggressive actions were indeed taken. The SEC and Fed required reddit to take down the message boards that had been weaponized against hedge funds, and forced Robin Hood to disallow users from buying stocks in Game Stop (and a number of other, secondary stocks redditors had targeted overnight). Later Robinhood went so far as to target and remove funds from certain accounts to counteract the wild day's activities, raising not only the ire of many of their users and the public at large, but garnering the attention of Washington.

In a rare show of bipartisan unity, political figures from Alexandria Ocasio-Cortez and Sherrod Brown, to Ted Cruz and others on the right spoke out against the unprecedented actions taken to protect hedge funds from, essentially, suffering the consequences of experiencing the downside of 'their own game.'

While this is still an ongoing story, it seems clear this is another case of 'the house never loses,' by design or in this case, a downright blurring of the rules. It now seems all that much clearer that Wall Street exists solely as a tool for 'the rich to get richer,' and any deviation from that course is squashed and 'corrected' promptly. At the very least the "free market" doesn't appear to be particularly "free" when it comes to empowering those without access to the "financial instruments" that the wealthy get to utilize.

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