What connects George Carlin with Gamestop?
You guessed it right: The Big Club!
Welcome to Decade of 2020, a newsletter with a relentless focus on how the next 10 years will affect the middle class. Forewarned is forearmed, they say. If you’d like to sign up, you can do so here. Or just continue to read…
Let me begin by using the Chinese form of the adage: “We live in interesting times!” Things got a little more interesting this week when a gang of serfs on Reddit (regular folks like you and I) stood up to the titans on Wall Street and made them s**t their pants.
In short, a band of retail traders on Reddit found a stock called GameStop which was heavily shorted by the hedge funds and decided to buy it…… en masse! The price went up and the hedge funds endured the pain for a while but ultimately had to cover their (massive) losses resulting in a short squeeze - which meant the price sky-rocketed beyond the stratosphere. You can read more about the story here but the prince of Bitcoin summed it best.
Of course, Wall Street was mad. What happened after reminded me the golden words of comedian-philosopher George Carlin. RIP GC!
…….the owners of this country don’t want that. I’m talking about the REAL owners, now. The REAL owners, the BIG WEALTHY business interests that control things and make all the important decisions — forget the politicians. The politicians are put there to give you the idea that you have freedom of choice. YOU DON’T.
You have no choice. You have OWNERS.
They OWN YOU. They own EVERYTHING!…..
…….It’s a big CLUB. And YOU AIN’T IN IT!
You and I are NOT IN the big club. By the way, it’s the same big club they use to beat you over the head with all day long when they tell you what to believe.
All day long, beating you over the in their media telling you what to believe — what to think — and what to buy. The table is tilted, folks. The game is rigged. And nobody seems to notice. Nobody seems to care.
George Carlin, 1937 -2008
But why were the “pretend-capitalists” on Wall Street so irate? WHY? Isn’t it how capitalism should be? Isn’t that what Wall Street, which refers itself to a shining beacon of capitalism, does with stocks on a routine basis? Strange, huh!
Nonetheless, the Big Club (as Carlin liked to refer to them) has privileges and they made some frantic calls to their minions, who got in the act right away. All the brokerage houses ganged up and stopped the retail traders from buying Gamestop stock while at the same time allowing the big hedge fund accounts to continue trading the stock.
And when there is such ongoing travesty of justice, how could the politicians stay away from pursuing their favorite hobby: virtue signalling. They were out in throngs.
Sure…her question must have raised the blood pressure of ordinary folks and gained her new followers on Twitter. But that is precisely the kind of question which does nothing to fix what is indeed wrong with the system. How about asking: “Does anyone know how Robinhood makes money despite not charging their users a single penny for trading securities while managing to offer their world class software platform for free?
I will tell you how: By selling order flow information to the bigwigs on Wall Street so that they can frontrun the trades you make and their high frequency operation can skim a fraction of a cent every time you put in a trade. That’s too tiny? Maybe, but when you do this a few million times in a day, the profits can be significant. Now, you may think that is clearly dishonest and ask “How is this even legal and why haven’t they been penalized and shut down?”
Memes apart, to be honest they have been. In 2020, Robinhood agreed to pay $65 million to settle an SEC investigation. This was because the company failed to fully disclose its order flow practices early on. In the North American context, these are known as fines (pay up and no one goes to jail). In the third world countries, where I am originally from, we prefer calling it the cost of doing business. On a side note, I highly recommend reading The Flash Boys by Michael Lewis if you are interested in looking under the chassis of high frequency trading operations.
The debate continued to get heated and influencers jumped into the already bloodied pool. They however weren’t there to scavenge; they were there to hunt: Dave Portnoy, with 2.1 million Twitter followers, didn’t hold anything back and publicly called out Steve Cohen of Point72 hedge fund. His rant below is a must listen.
The story continues…… More on this later.