If you’re reading this article, odds are you’ve already Googled “how does a short stock work” and “what is a short squeeze” about five times this month while watching GameStop’s (GME) stock take a wild roller coaster ride.
Once you’ve spent the obligatory hour on Investopedia untangling terms like stock, call, put, squeeze, volume, and cap, you may have picked up a few shares of GME to join the revolution. If you did, some questions still remain, such as, what on earth is a clearinghouse deposit? And why are brokers allowed to withhold my report?
Like millions of other Americans, you may have a small stake in the game already, or you may just be enjoying the show from the sidelines with a fresh bowl of popcorn. For most Americans on either side of this trading battle, the question of how has been thoroughly answered.
The big guys gambled, and the little guys called their bluff. It’s beautiful and catastrophic all at once. Media outlets and even representatives across the political spectrum agree that this is a special moment. A once-in-a-lifetime trainwreck like this, one of billion dollar proportions, could even have implications for the future of the market as we know it.
As we come to grips with how this happened, Americans turn their focus towards answering why it happened. Why GME? Why this short? And why now? Well, there are a few answers. Sure, folks are bored at home with a little extra cash on hand, that is, if they’ve kept their jobs through the pandemic. Yes, the pandemic has redirected spending away from other recreational outlets these investment dollars may have otherwise been put towards. And absolutely, with more time spent stuck at home, more people are turning to the market as a means of wealth generation or even simple recreation. But these factors alone cannot account for the die-hard and heedless abandon with which millions of retail investors have charged the proverbial hill that is the GME short squeeze. After all, in the past, market makers have shorted and won rather regularly without small-dollar investors rallying to wreak havoc.
Many are filing this new retail market force alongside the laundry list of other things millennials have “ruined” under a tab marked “stuff the internet broke.” Others still have characterized this run on GME stock as a spree of momentum trading, propelled to new levels by the burst of coverage it has received in the media. I believe that there’s more to the story.
Most of the media coverage surrounding this event is similar in nature. News outlets have characterized GME holders as irresponsible, uninformed, and generally reckless, with little care for the impact or the outcome of their investment choices. I believe this couldn’t be further from the truth. Sure, every investor hopes to turn a profit, but assuming this is the only motivation for buying and holding GME is a fundamental mistake. After spending a few hours on the WallStreetBets forum, anyone can see that the reason many posters have for buying and “HOLDING” is far from personal profit alone.
In order to understand why millions of Americans were willing to hurl a large sum of their capital at this acknowledgedly risky stock play, you need to take a few steps back. Now, Robinhood has been, until recently, a leading platform for the participants in this retail revolution. With some 13 million users as of 2020, their users’ average age is only 27 years old. So let’s take a look at this average user’s experience thus far in the economy.
This same generation has been institutionally frustrated at every turn of the classic American story. It’s a commonly told and even more commonly ignored tale. College prices have soared, burdening younger generations with massive debt. Even while paying down this debt, the housing market has remained out of reach due to a decrease in entry-level wages as well as a combined increase in housing prices and rents. Taxes on middle incomes have steadily risen over the last decade. Yet, every year, another major story breaks, to seemingly no effect, about how one billionaire or another multinational has evaded the mass majority of their tax responsibility.
Meanwhile, trillion dollar bailouts have become all but expected. These same financially disenfranchised generations watch every few years as their tax money gets packaged up neatly into million or even billion dollar golden parachutes for executives in the financial industry.
I believe this frustration has come to a boiling point. Even for more financially successful young members of the economy who might not have suffered all of the ills listed above, some part of this story will generally ring true. A growing sense that the rules of the game aren’t fair has festered in neglect for years. Even now, the financial sector soars to greater heights while unemployment and poverty rates hold at historic levels. It’s no wonder that when an opportunity presents itself to take a shot at the institution, millions of young Americans were happy if not thrilled to throw whatever financial support they could towards the cause.
Whether their rage against the financial powers that be will prove boon or bane for this army of retail investors is yet to be seen. What should be clear though, is the extent to which this new generation of traders is willing to take on risk for a shot at those on top and a piece of the American pie.