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No one is scared of reddit investors

There have been a lot of memes circulating since the WallStreetBets reddit began its Wall Street rampage last week. Most of those memes focus on how redditors are some kind of ragtag group of misfits who are destabilizing the market and have professional investors quivering in their $50,000 shoes. But just how accurate is this image? Are investors really scared of what is happening and what it represents?

Haha, nah.

A lot of attention has gone to Wall Street investors who have opined that the whole thing seems dangerous. Investor Michael Burry, made famous in The Big Short, said exactly that on January 26 in a since-deleted Tweet.

But Burry owns over one million shares of GameStop and briefly saw his GameStop stake surge to $271 million. That’s far more than any reddit investor made, and he’s not alone. GameStop’s nine largest investors saw their collective shares swell to $16 billion.

What about Melvin Capital, the short-selling hedge fund that sparked this whole thing in the first place? It lost more than half its value in January, which is a lot. It isn’t bankrupt, though. It isn’t even clear that it’s all that hurt: clients new and old are still signing onto Melvin.

Okay, so maybe the rally has made billionaires wealthier and didn’t significantly impact the operations of the hedge funds, but what about Robinhood? Robinhood was so scared it shut off user access, right?

Eh. No. It’s true that Robinhood shut down trading of GameStop and other reddit-targeted stocks, and it’s true that the shut down quickly exposed how most small-time traders rely on a platform that’s subsidized by selling their data to hedge funds and other capital firms. Hell, any number of class action lawsuits filed against Robinhood are doomed to failure because of the forced arbitration clause in the app’s terms of service, something few people paid attention to prior to the incident.

Robinhood, though, says it shut down GameStop trading because the way the company works meant it was in danger of insolvency. Robinhood doesn’t actually use its users’ money – not instantly, anyway – but rather makes trades with borrowed money until the user’s deposits clear, which can take two business days. This is part of why Robinhood has always limited the number of trades its users can make in any given day, but the volume of trades was threatening to bleed Robinhood dry. Of course, to get the money it needed to keep running, it had to go to Wall Street, to the kinds of firms that reddit investors were targeting. It’s entirely possible that they influenced how the company handled reddit traders; that’s something that could be hard to prove, but doesn’t seem far-fetched.

On the other hand, why? As mentioned already, if your firm had a position in GameStop already, your net worth went up. Wall Street firms don’t care that much about each other, so there’s little reason why an unaffected firm would be up in arms about this whole thing.

Don’t get me wrong. The memes are fun. They are a kind of catharsis – the whole thing is, really – allowing individuals to blow off steam that has built since the 2008 financial crisis. The decade since 2008 saw financial firms continue to rake in cash while real incomes were basically stagnant across the United States. The real change, though, isn’t going to be through armchair traders making casino bets. The entire incident has opened our eyes to the reforms that could make the economy fairer for everyone, and that’s the real prize.

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Christopher Pereira View All

Political scientist and layabout, editor at Pyramid, maybe an author someday? Of like a real book? No need to rush it, though.

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