GameStop story – it’s going crazy

“Rather than retreating from the company’s over-valued shares, traders have embraced them with nihilistic exuberance.When I worked in high finance it was a running joke that day traders – small retail traders – were like beetles sifting through the dung of the big funds that truly drove the markets. They are in a weak position, given their lack of capital and coordination, but an entire retail brokerage industry – nowadays exemplified by companies such as Robinhood – is designed to cultivate a myth of their heroic status.

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That’s why the GameStop story stands out. In his book Liar’s Poker, former Wall Street trader Michael Lewis described powerful traders who work for big investment banks as “big swinging dicks”, but the folk appeal of the GameStop saga stems from the fact that a swarm of “little swinging dicks” have seemingly banded together to become a giant swinging dick, defying gravity to push the price of a stock far beyond its actual underlying value.

Stock traders are split into two camps. The first are detectives who study the actual company a share pertains to, a process called “fundamental analysis”. The second do “technical analysis”, which involves studying the actions of those doing fundamental analysis. Day traders are notoriously prone to technical analysis because they lack inside access to companies or teams of analysts, so are forced to huddle in forums discussing graphs representing the actions of other traders.

This is where much market surrealism emerges, because it turns out that all those graphs that technical traders watch also reflect the actions of other technical traders. If traders are watching traders who are watching traders, rather than watching the company, the market lapses into a twilight zone.

This has happened in the case of GameStop. The share price has almost entirely detached from the company, but – in a strange twist – everyone has become self-aware of that fact, and rather than backing away, have embraced it with nihilistic exuberance. The share price rising was a symbol of pure “irrationality” – everything economics textbooks say shouldn’t happen. This is why it seems so symbolic. But what is it symbolic of?

A popular current interpretation is that it’s a David-and-Goliath fight against hedge funds who have been betting on a fall in share price through “shorting”. Think of shorters as being like people who borrow tickets to a concert, then sell them at the door to people trying to get in, before telling everyone that the theatre is burning, then waiting outside to re-buy them at a fire-sale price from the fleeing punters, before returning them to the original owners and walking off with a profit.

In this case, shorters are “waiting at the theatre door” to buy GameStop shares that they shorted. Citron, the hedge fund that’s been caught up in the story, does fundamental analysis before shorting and loudly broadcasting the news to technical traders, hoping that they will bolt for the exit. Rather than doing that, however, the herd realised that Citron and many other short-sellers were waiting to re-buy shares, and instead of rushing for the exit to allow them to all cash out, backed away and barricaded themselves in the theatre, knowing the short-sellers would eventually have to rush “into the theatre” to re-buy, causing what’s called a short squeeze.

The GameStop version of this is interesting because it’s been meme-powered. The day traders have drawn upon the guild-like, tribal structures of the Reddit and gamer community to transform themselves into that “giant swinging dick”, standing against the mere big dicks of the hedge funds.

Dick metaphors are apt because day-trading has always been a realm of bros, and herein lies another possible interpretation of events. In the old days the retail brokerage industry almost exclusively drew on macho imagery to send male traders off to fight the markets, but some platforms at the centre of the GameStop story are a little different. Robinhood was one of the first “woke” trading apps geared towards millennials. It played into an emo version of the “bullshit jobs” narrative: your job is pointless. Stop working for the man and become the Man by seamlessly buying tiny slices of companies.

The last few years have produced a barrage of articles about populism powered by angry men who were promised things. Those narratives are normally metaphorical – no actual promising takes place – but when it comes to day-trading, they’re quite literal: the retail brokerage industry literally promises escape from the grind by telling men that they’re destined for market greatness.

That industry, though, is called “retail” for a reason: wholesale mega-players don’t want to deal with the little man. They rely on retail firms – such as spreadbetting firms – to pen the day traders into closed ecosystems where they can fight each other, while retail firms harvest them for fees and interest before laying off the residual risk into the actual markets.

If anything, GameStop could be a reaction against the zero-sum futility of day-trading. Far from saving you from bullshit jobs, trading is a bullshit job, and the only way to temporarily win at it is not to throw yourself into battle against “the market”. It’s to collaborate in swarms.”

• Brett Scott is a former broker and the author of The Heretic’s Guide to Global Finance

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