G’day, and welcome to Mundo #26! This week, I dive a little deeper into the GameStop saga, and how it is an instance of rising, society-driven political risk that won’t subside any time soon.
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Has the game stopped?
Wall Street has been flummoxed in recent weeks as a legion of retail investors collaborating on Reddit - so-called “Redditors” - drove up the price of ailing gaming retailer GameStop (GME). The move triggered eye watering losses from hedge funds and other institutional investors holding short positions on the stock. After peaking last week, GME is returning to pre Reddit frenzy levels.
Hedge funds and traditional investors are realising their exposure to new, societal-driven political risks, grounded in what Nigel Gould-Davies (see Mundo #25) describes as growing “societal demands for higher corporate standards and behaviour across a widening range of impacts”.
This has arisen through the expansion of markets themselves, and the expanding participation in these markets, enabled by technology. Apps such as Robinhood ushered in a new wave of “untraditional” investors throughout the Covid Crisis. Information barriers were lowered and transaction costs reduced. This has attracted a flow of investment unwilling to follow traditional investment norms. As was the case with GME, sudden stock momentum is sometimes devoid of investment theses based on traditional economic fundamentals, and instead pushed by social trends and political statements.
Institutional investors aren’t the only group ruffled by these new actors. Publicly traded companies such as GameStop also bear risk to volatile swings in their stock. Trading platforms like Robinhood must manage competing financial and reputational risks, tugging them in opposite directions between regulators and clearing houses, and the new wave of retail investors they market to. Sudden swings in GME’s trading volume triggered a liquidity crunch for Robinhood last week, forcing it to raise an additional $3.4bn in capital. Yet by curbing the trading of GME and other select stocks, Robinhood provoked a backlash from some of their users. However the surge in downloads of Robinhood last week - 1 million over three days, or close to 10% of their entire app download history - suggests that reputational blemishes haven’t damaged its popularity, for now. However the balancing act for Robinhood remains, and engaging with their user base will require a deft form of corporate diplomacy - a far cry from traditional political engagement in the hallways of Capitol Hill and the tables of Capital Grille.
They can keep their reservation at the Capital Grille, however, because Robinhood executives are expected to be called in front of Washington lawmakers on February 18. Expect much grandstanding from the edges of Washington’s political spectrum such as Alexandria Ocasio-Cortez and Ted Cruz, who both tweeted their support for Redditors this past week, albeit from differing ideological perspectives. For now, don’t expect broad financial market reform, as there isn’t any broad congressional consensus on what that looks like. Some are pushing for greater investor protections, others to clamp down on market collusion. In the short term, we’re most likely to see regulatory action to enforce rules against market manipulation, and a push for higher capital requirements for online brokerages such as Robinhood, as the FT notes.
Redditors are overwhelmingly capitalists looking to profit from the stock market. Yet their unconventional style has held a mirror to Wall Street’s own practices, triggering debate on social media and Washington over the fairness of long-used Wall Street investment strategies. This could add momentum to ideas at the extremes of the political spectrum as a rebellion against the perception of a “rigged” economic system beset by double standards and unfairness. A perception of a failure by Congress to take action could reinforce this. This was echoed in a recent article in the New Republic, a left-of-centre publication:
If the GME fiasco is heightening any contradictions, it’s calling attention to the blatant absurdities of casino capitalism. How is the Redditors’ collaboration much different from hedge funds and institutional investors deciding to short GameStop almost as a collective? Why is market manipulation and activist investment acceptable when a billionaire does it but not when an anarchic group of quarantined day traders does? Why is it OK to bet on a company’s failure? Pull at these threads long enough, and you might unravel the ideological underpinnings of the financial industry. It’s not just money Wall Street fears losing in this imbroglio; it’s its legitimacy, too.
As the GME bubble deflates this week, we’re left asking - is this a one-off occurrence, or will meme-driven market movements become the norm? If so, who is next? What is certain, I believe, is that online, decentralised herd momentum has heavily impacted society for over five years, and it will continue to do so. This phenomenon is agnostic to the cause. It has, and will continue to be leveraged for positive and negative purposes. Think of the surprising ability of protestors in Hong Kong to evade and outwit security forces in 2019 as they objected to looming national security laws that have curbed political freedoms. Think too of the online planning of insurrectionists who stormed the Capitol at Donald Trump’s goading on January 6.
The rallying cry to a cause has long left the town square, instead emanating from the cybersphere. It is a political risk that firms, and financial markets must contend with.
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Stay calm, think of others, stay healthy.