I think it starts with the discovery a year ago by a Redditor in this subreddit community r/WallStreetBets that GameStop was being shorted to an extent you’d only short a company if you were expecting them to go bankrupt or were trying to get the share price to drop — and that this was artificially undervaluing GameStop stock. And so this user (I think the name was Deep Value on the community) was basically arguing that people should be long on GameStop: they put up a $50,000 position in options anticipating a massive increase in 2021, and then they spent the next few months constantly pushing this idea that there was way too much short interest — short interest basically represents when an investor says they’re going to borrow stock from someone and sells it, anticipating a price decrease, then buys the stock once it’s cheaper and pockets the difference.

Eventually, people started to listen and started to catch on. GameStop announced strong numbers and e-commerce growth, and they brought on some new board members who were signaling that they would focus and pivot more to e-commerce. These were encouraging signs, and this resulted in the community galvanizing a bit behind it. Then, you started to see the hedge funds, particularly Citron Research, get a little vocal about how this was stupid and this community didn’t know what they’re talking about.

That, combined with the undervaluing, combined with the community, led to a really vicious cycle of hype, frenzy, and euphoria about supporting the stock. And within a month, within a few weeks, it went from trading at a few dollars — you know, $20 to $68 to a peak of, I believe, almost $490. Now, it’s around $280 or $270. As a result, there’s been a really big debate and an attempt to seize a narrative about who’s responsible for this: Is it the hedge funds? Is it the Reddit community? Is it retail investment law? Is it the platforms who are responsible for this massive surge? And what does it mean?

Robinhood markets itself as being born out of Occupy Wall Street, having been created by two relatively wealthy founders who met at Stanford I believe. Its stated goal is to democratize finance, to give access to the stock market to everybody in a way that I think is roughly equivalent to homeownership: i.e., it’s something that everyone should aspire to, to have a piece of a company if they want to. Robinhood has been popular because it has a relatively low barrier of entry to trading, and you can do relatively complicated trades compared to other places that require you to put in a lot more capital. You can do options trading on Robinhood, for example, with little to no money, whereas other places specifically require you to have a margin account — a type of account that allows you to borrow money from a broker.

Robinhood’s core thing, the reason why it’s a freemium platform, is that it offers no commission on its trades. But it does sell your trade. What it does is: it takes your orders, and it has them executed by a market maker — a large firm that handles trades in day-to-day operations. In this instance, it’s Citadel Securities (which is their largest customer) that handles about 50 percent of their trades, and this resulted in some backlash, as we saw last week, when the ordering and the trading were halted a bit. And immediately, people began to believe that it was because the owner of the firm, Ken Griffin, leaned on Robinhood, because he also owns a hedge fund that was implicated in bailing out a GameStop short seller.

But these platforms, their goal ostensibly is to democratize finance, but they’re really just selling your information. It’s another product that they’re offering to other companies to make a profit. That’s how they make most of their revenue. And I think it’s also really important to note that these supposed democratic trading companies were not transparent about the fact that they’re just normal trading platforms. The real reason why Robinhood halted those trades is because they were so volatile that clearinghouses were going to need more collateral to back up the trades than they actually had, so rather than telling anyone this, it said, “Oh shit, we just have to stop it.”

Yeah, I think it’d be fair to say. I mean, when you hear Robinhood talk about “democratizing finance,” it’s important to step back because what does “democratizing finance” actually mean? If you’re an ordinary person and you really want to make money on the stock market, it’s the equivalent of a casino, so your best bet is to throw money into long-term investments. So to “democratize finance” is really to just open up the casino to as many people as possible, while masking it in a language of universal stock ownership. Because, at the end of the day, a significant number of people in this country don’t own stock. If they do, it’s through investment vehicles like a 401(k) or an IRA. But the vast majority of people never trade stock and have no interest in trading stocks or can’t afford to trade stock because if they lose money — which they probably will — and are living paycheck to paycheck, the idea of throwing more money into the stock market on the promise of maybe realizing outsize gains . . . that’s just a cynical marketing ploy.

Yeah, it ends up being a lot more complicated than that. If you look at GameStop or AMC, some of the largest holders of these companies that are being invested in as part of the fight against short sellers are large institutional investors that have massive slices of almost every single publicly listed company. BlackRock, for example — which is one of the five largest shareholders in 90 percent of the S&P 500 — is a huge GameStop investor. It had a $174 million stake and about 13 percent of the company and at the peak of this explosion was worth $3.1 billion. Of course, BlackRock is not going to liquidate its GameStop shares.

But BlackRock is also in a position to do something called securities lending where, if you’re a short seller, you can come to me and, if I’m BlackRock, I can lend shares to you, and you just have to give me collateral. And the collateral is a steal in and of itself because GameStop stock is worth nowhere near $400. It’s not worth $4, but it’s also not $400. So you’re handing over collateral equivalent to a massively inflated price, just so you can get out of a ridiculous short that you’re trapped in. So these companies — BlackRock, Vanguard, Fidelity Investments — have securities lending programs and have massive stakes in companies like GameStop, AMC, BlackBerry, and so on. And they’ve been able to make hundreds of millions of dollars over the course of this entire spectacle by either lending out the securities or maybe liquidating some of their assets. That should tell us that this isn’t simply the little guys waging war on the hedge funds. They might’ve taken down one hedge fund — they did cost Melvin Capital billions of dollars — but they’re doing nothing that fundamentally threatens the way that the financial system operates. At the end of the day, we have a stock market that is not realistically connected to the livelihoods of workers or people on the ground, and that also isn’t even efficient relative to its own logic.

Doug Henwood had this piece talking about how there’s been about $671 billion raised in IPOs since 2000. But in that same period, there’s been about $8.5 trillion spent on stock buybacks. That, alongside the institutional investors benefiting, is the real story about what’s going on. Yes, there was a move by different groups of people against these hedge funds to make money for themselves, in addition to other ongoing trends — like the rise of younger retail investors, social media investors, financial TikTok (all these events have come together in a perfect storm) — but at the same time, this storm is taking place in a system that is not going to experience any real shock because of it and is probably going to entrench itself further.

There are already some lines being drawn. Some people are saying, in relation to Robinhood’s behavior during all this: “How can we make sure trading is never again halted? How can we make sure that we can universalize and democratize finance and stock ownership and the right to trade?” These kinds of demands might result in weakening Dodd-Frank; they might result in trying to ensure in one way or another that retail investors have access to platforms, etc. I think that those are the wrong solutions, by the way.

Others might seize this moment to say that we need to punish retail investors and that they’re too reckless and dangerous and that they’re hurting the hedge funds that optimize the markets (or whatever those companies tell themselves they do). They are probably going to advocate for stricter requirements, higher barriers to entry on platforms like Robinhood, which would probably blow up its business model.

But I think at the end of the day, there’ll probably be jockeying between that and short selling. Some people are seizing on that and saying it doesn’t need to exist. I think Elon Musk is a pretty prominent example of someone who’s been trying to wage a war on short sellers. I personally don’t really care for them, and I don’t really understand a lot of the arguments being made that they’re necessary for the economy, especially when you look at what happened with GameStop.

So it’s really just going to come down to who wins out: Is it going to be the crowd that wants to regulate retail investors, or is it going to be the crowd that wants to regulate the hedge funds? I’m more inclined to believe the hedge funds are going to win just because of the impressive lobbying machine the financial industry has. But who knows? If nothing else, things may be different if people come to hate Wall Street and finance even more as a result.