Illusion of Democracy in Financial Markets

The echo chambers of Wall Street are still recovering from the dramatic events of January 2021. The protagonists, in this case, are r/wallstreetbets, an online group on the social media platform Reddit. The group consists of retail investors (individuals trading stocks), who used online commission-free apps such as Robinhood, to purchase both stocks and options. At the centre of the drama is GameStop, an American gaming retail store, selling electronic gaming equipment, accessories, and merchandise. GameStop, whose physical store model had seen a decline in its fortunes amidst increasing online gaming purchases, had taken a further hit with the pandemic. Wall Street hedge funds Melvin Capital and Citron Research had been gearing for short-selling GameStop stocks. Short-selling is the act of borrowing stocks to sell in the market, betting that the prices of a stock will fall, in essence, ensuring a profit in the reduced value of a particular stock. Members of r/wallstreetbets had other plans, as they coordinated a “short squeeze” through their group, buying up GameStop stock resulting in the price of GameStop stock to rise almost 2,000% at one point. The hedge funds, which incurred huge losses, tried to secure their positions, buying back their stock at increased prices, receiving financial bailouts from industry insiders. A “Gamma squeeze” by r/wallstreetbets ensued, causing greater losses to the hedge funds. Gamma squeeze is another method used to shore up prices through prior-purchased options which come at a fixed rate and can be exercised by investors within a particular time frame.

Individual trading in derivatives, facilitated through these apps, suddenly saw its promoters in the establishment calling for stringent regulation. At the same time, some circles are hinting with a wry smile, almost seeing it as a revolution from below that has managed to humble Wall Street. Others have begun to herald the democratic upsurge this moment marks. These responses may give solace to the millions in the United States who directly or indirectly faced the effects of the 2008 crisis. However, with an unrestrained financial system unapologetic, even after generous state bailouts, this moment appears to provide more insights than answers.