Recently, we may have seen the needle move on the way the financial sector behaves in a way that did not happen in the 2008 crisis when no-one was held to account over sub-prime mortgages.
This time round it was the turn of the big hedge funds that used a process which many people find hard to understand. Short selling.
The clue to what short selling means lies in the title. It is making a quick buck out of an ailing stock. Of course, the underlying truth is much more complicated.
Here’s how it goes. When investors short a stock they first borrow it from someone else, typically a financial institution of some kind. They borrow the stock for a specified period of time, after which they will return it back to the lender, who is paid for their trouble into the bargain. Once in possession of the borrowed stock, the short-seller sells it at the current market price. If the stock then falls in value, as they hope it will, they can buy it back more cheaply to repay the lender and pocket the difference in price.
But no-one at the hedge funds could have foreseen the train coming down the tunnel. They forgot that every once and a while people really care about a business. More importantly, they might be able to do something about it. Especially now that Tech has opened the door on previously elite institutions.
The reality is that the hedge funds should have been able to work out that we are in a different world with a different mindset. But they didn’t.
Because the company they set their sights on was GameStop. It might not mean much to a vast swathe of the older population but it meant something to Millennials.
In the US GameStop was the retail outlet for a generation who often lived and breathed the games they bought in the local mall. A game here, a Krispy Kreme there. In the UK it was the same with a different name – my son Fergus O’Loan – spent four days watching the story unfold. These shops were central to who they were. Part of their heritage.
Here, he explains the Millennial position.
Short selling, or shorting, means billions to those who put profit above all else. That makes perfect sense to well-qualified financial specialists who live and die by the sword of a complicated gamble. But to a group of amateur day traders on the Reddit platform it was a much simpler equation
So, when the hedge funds went in to borrow, the Millennials went in to battle.
They asked themselves, “Does the house always win.” The answer became clear over a matter of days.
When the reddit group started their "Big Short Squeeze" shares climbed up 7000%. According to Business Insider, Hedge Funds at one point lost $5 billion.
Social media virality is something our society has not yet fully understood. We can see it in politics. A former US President, so accessible to the people on Twitter, is only proof of its impact but that had never really affected the financial sphere.
The truth is technology leads to more access to the stock market and a social media and that leads to millions of people around the world being able to instantly communicate. That means you have a paradigm Wall Street did not see and did not know how to handle.
The people of wallstreetbets felt patronised by establishment investors. They thought they were being exploited and patronized. They seized the moment. This escaped the subreddit bubble and entered Twitter, Instagram and Facebook. Suddenly everyone was weighing in.
Until wallstreetbets spread the word that anyone with $300 dollars could get in on the action and take a bite out of a group they felt had wronged them, little happened. Then, lots of people made the point that they didn’t care about the money. They are said, “I don’t care if I lose money, so long as the hedge-funds bleed.”
At every turn, those people felt beset by a system they believed was rigged against them. Their brokerage platforms, fresh from espousing messages of giving power to the people, restricted them from buying a stock they wanted. For whatever reason, it felt like a violation of the free market. Which would have been fine except that they felt that establishment investors were able to getaway with things they couldn’t.
When the hedge-fund that made a sour short was bailed out to the tune of three billion dollars, that feeling was compounded. At every turn, the resentment bubbled. An institution that doesn’t ordinarily have to explain itself to the uninitiated may have to do exactly that.
The genie is out of the bottle.