A funny thing happened on the New York Stock Exchange this week which was best described by one of the high volume traders with:
"They acted as though the stock market was a casino, with no regard for people's money which wasn't their own."
I find this laughable because for hundreds of years and probably ever since there was a stock market, traders have always treated the buying and selling of securities as a casino and have been placing bets on what future movements in prices will do. Arguably that's all that the entire financial system does because it produces nothing of any tangible value whatsoever and merely apportions wins and losses according to sets of agreed upon rules; and the whole thing is backed by real goods and services and people actually doing real work of value.
To cut this whole story incredibly short, a group of people from the Reddit message boards decided to short squeeze a series of targeted companies on the New York Stock Exchange, with the most visible example being Game Stop.
A short is bascially a bet that the price of something is going to go down; it involves investing in such a way that the investor will profit if the value of the asset falls.
There are a number of ways that an investor can achieve a short position and the most obvious way is so-called "physical" short-selling. That involves borrowing assets like shares or bonds and then on selling them.. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen between the time of the initial sale and the time the equivalent securities are repurchased, the investor will have made a profit equal to the difference; conversely, if the price has risen then the investor will bear a loss.
Got it? Good.
By deliberately buying up shares that they saw as underperforming (like Game Stop) and which traders had taken up short positions on, the group from Reddit forced the share price upwards and that has the effect of ruining the short. Professional traders are now complaining that targeted efforts from the outside which have resulted in them making losses are somehow unconscionable despite themselves doing a job which essentially is exactly the same kind of thing except with better information. Insider trading is when people in the market make trades on information that the market doesn't know about (usually coming from inside the board rooms of companies) but the argument that what the Redditors has engaged in is 'outsider' trading is immediately nonsensical. Outsider trading for want of a better word is otherwise known as trading.
One of the consistent things that is oft repeated throughout history is that when you have a group of people who have acted like a bunch of sociopaths with no regard from anyone else, when someone else plays by the rules which have been laid down (usually by the people who have acted like a bunch of sociopaths) and they find that their private advantage is in trouble, their next reaction is to go feral. Subsets of the group may even try to twist the narrative to include some kind of sappy story which paints them as a cruelly treated victim, or perhaps someone with a particular need. You see if it all of the time with issues like education, workers rights, and overt racism, where suddenly the privileged few become worried that their private advantage is under threat.
While this sounds like a new thing, it actually goes all the way back to the beginning of share trading; probably back to the very first share. A chap called Isaac Le Maire, who was a Walloon (Wallonia is now in modern day Belgium) was a sizeable shareholder of the Dutch East India Company (Vereenigde Oostindische Compagnie - VOC). Le Maire subcribed for shares to the tune of 85,000 guilders and he became the largest VOC's shareholder. In 1605 he was kicked out of the company and while it isn't exactly clear why, it's probably because he was running some kind of expenses fiddle.
In 1609 he and eight others founded a secret company with the sole purpose of exacting revenge on the VOC. Their new company with the purpose to trade in VOC shares, then started spreading rumours that ships had sunk, or that the British had chimed in on the spice trade etc. Le Maire then sold short shares of the VOC, without actually owning them and by the time these shares were to be delivered, there was an interest in keeping the share price as low as possible. This was obviously detrimental to the existing VOC shareholders, who sometimes were forced to sell their shares at a low price. In particular, in 1609 the share price fell significantly, and the VOC imputed this to the machinations of Le Maire.
What did they do? They acted like a bunch of sociopaths and went feral. They twisted the narrative to include a sappy story that short selling was hurting society's most vulnerable and that there was a large number of widows and orphans who had invested all their money in the VOC. That then just like now seems highly dubious but the Dutch government did issue a partial ban on short selling and Isaac Le Maire was barred from accessing any of his shares.
It is unclear exactly what the New York Stock Exchange is going to do at this point but it looks like that they have also acted like a bunch of sociopaths and gone feral. Trading platforms including Robinhood and Interactive Brokers have have their trading restricted as the sociopaths with no regard from anyone else, have acted like sociopaths with no regard from anyone else.
https://www.sec.gov/news/public-statement/joint-statement-ongoing-market-volatility-2021-01-27
We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.
- Acting Chair Allison Herren Lee, U.S. Securities and Exchange Commission, 27th Jan 2021.
"consistent with our mission to protect investors"
Yeah, that says it all.
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