Reddit Users Prove Stock Market Double Standard
On Wednesday, Reddit users proved why a double standard exists for those trading stocks on the stock market. Reddit users gave hedge fund managers a taste of their own medicine by creating a fund of their own. By investing heavily in failing companies, AMC and GameStop, they forced traders betting against the stock (called short selling) to actually buy the stock in order to offset losses. But instead of forcing the short sellers to sweat it out, trading of AMC and GameStop stock was temporarily halted on TD Ameritrade and Robinhood platforms, proving the existence of a stock market double standard.
In order to understand the stock market, we must first understand what it is not. The stock market is not a number measuring the health of the global economy. If it were, the nearly one million new unemployment applications made in Donald Trump’s last week in office would keep the stock market from reaching all-time highs.
The Dow Jones Industrial Average is simply an estimate of the consumer confidence in 30 large companies publicly traded on the Dow Jones. The same goes for the 500 companies in the S&P 500. Stock prices are quite literally an estimate of consumer confidence in publicly traded companies.
Consumer confidence in a stock is estimated by measuring the volume of trades and the net positive or negative trend of buying and selling of those stocks. The stock market is no different than sports or politics betting: big bets swing the odds, but so do a lot of small bets by Reddit users.
When a hedge fund manager bets a bunch of money that AMC or GameStop stock will fall (called options trading), that carries a lot of weight in lowering those stock prices. The same goes for Reddit users who band together to mirror the influence of a hedge fund manager in the opposite direction, until platforms stop allowing the trading of AMC and GameStop stock, which is exactly what happened.
The Reddit “Wall Street Bets” community was banking on the “free market” being protected. Instead, the big money was protected at the expense of those with little money. Capitalists have always and will always respond in this manner. The capital of the rich is protected at the expense of the poor because the lion’s share of capital invested in the stock market belongs to a very rich few. And the moment the rich start losing money, the whole system of capitalism is at risk. That’s the risk in having vast income inequality between the rich and the poor.
When the stock market plunged as a result of the Coronavirus pandemic, I invested my pandemic assistance checks in the stock market. I figured since the rich invest in the stock market to avoid paying taxes, that would be the safest place to stash my cash. The timing was obviously perfect for investing in the market, but it was the auto and bank bailouts of 2008 that motivated my investment. Whether Republicans or Democrats are in power, both have precedents for defending the dollars of the rich over the dollars and jobs of the poor.
I also expected volatility to eventually play a role in the stock market, which it did last week. My stock portfolio fell around 20 percent over three days, but I’m not selling my shares. In fact, I’m buying, because the best way to take advantage of volatility is to buy, not sell. I play the long game when it comes to investing, unlike these hedge fund managers short selling AMC and GameStop with hopes they’ll fail. The Big Short is all about how a few smart people bet against the mortgage lending market and made billions. Here’s Margot Robbie in a bathtub explaining why they did.
I don’t like the idea of betting against the success of companies or industries, so I don’t do any short selling. I actually do no options trading of any kind. I do, however, make principled stock purchases. I could have invested my pandemic assistance checks in fossil fuel futures surely to rebound from their negative valuations, but I divested in fossil fuels years ago. I don’t give money to dirty industries or companies. My Aspiration IRA invests in sustainability, as do my STASH investments. My Robinhood portfolio, that’s still up over 70 percent, is buoyed by investments in renewable resources and electric/hydrogen vehicle technology.
My long play in the stock market helps guard against the volatility experienced last week because I’m not concerned with where the market is. I’m concerned with where the market will be years from now, and I’m not concerned. Rich capitalists will forever defend their capital like the Alamo, and much of it is wrapped up in the stock market to take advantage of low capital gains taxes and high rates of return.
Do I have a problem with what Reddit users did? No. They exploited the market just as hedge fund managers have always exploited the market: by betting so big the bookkeeper changes the odds of a particular result occurring. But the volume of their bets weren’t big enough to stop taking bets altogether. That’s why I have a problem with the trading platforms that halted the trading of AMC and GameStop stock. People coming together to support a business they want to succeed shouldn’t result in the protection of bets made against those businesses. It should result in exactly what resulted until trading was halted on AMC and GameStop stock: a volatile market reflecting the increased estimation of consumer confidence in those businesses.
Reddit users put their collective money where their smart mouths are, and stock trading platforms responded by slapping those smart mouths.
