JANUARY 31 — A funny thing happened last week. An American company called GameStop — basically a chain of stores that sells video games — saw its stock market value surge over 2,000 per cent in the last few days.
In early December, shares of GameStop were worth about US$13 (RM52) but last Thursday, GameStop shares were trading at over US$300 on the New York Stock Exchange.
It’s a spectacular rise and of course, these things do happen but not like this.
GameStop’s rise wasn’t driven by any amazing performance or development by the company. The company is actually not particularly successful.
This outstanding stock performance has basically been the result of a battle between short selling hedge funds backed by billions of dollars of institutional funds from banks and retail investors who are basically ordinary investors who invest their money in the stock market,
The hedge funds had looked to short GameStop. Short sellers essentially borrow stocks and return them over a set period of time and they benefit if the price of the underlying company falls.
Basically short selling allows you to profit from shares when they go down. This strategy is widely used by hedge funds.
Often hedge funds take short positions i.e. they bet that a stock is going to decline and then they use their huge financial influence to drive the price down.
So they stack the odds in favour of getting the outcome they want and generate huge profits. Multiple hedge funds have been accused of working together to get stocks down to a particular price.
Retail investors, suspecting GameStop stocks were being shorted and manipulated by hedge funds, stepped in.
Using online forums and empowered by new trading apps like Robinhood, which makes it easier for ordinary citizens to buy and sell stocks, thousands of small investors co-ordinated and systematically drove the price of GameStop up.
This had a huge impact on the hedge funds. These funds had borrowed shares hoping to give them back when prices dropped but the prices hadn’t dropped... they had risen exponentially.
In investment language, this is called a short squeeze and funds lost billions as a result of GameStop’s price increase.
Retail investors began using this strategy on other stocks, inflicting more losses on major funds — some estimates say the last few weeks have cost hedge funds over US$20 billion.
Again this may all be happening in a financial market half a world away from us in Asia but it is actually very important for all of us.
The action taken by the retail investors exposed the tactics used by the hedge funds to manipulate prices.
They also made it clear that investors could defeat these tactics if they worked together. It’s a unique situation.
For most of the last 50 years, the markets have been under the control of powerful financial institutions, banks, funds and a few extremely wealthy individual investors.
But last week this dominance was challenged for really the first time.
Of course these powerful institutions didn’t take this challenge lying down. In the last few days, they have stepped up their attacks on this army of retail investors.
Forums where individual investors would co-ordinate their positions have been taken down by Reddit, the platform which hosted them.
Robinhood blocked investors from buying certain shares — usually the ones they had been co-ordinating to buy.
Basically, ordinary investors are being denied a forum and platforms to trade and participate in the market. This sparked an outcry.
Despite longstanding claims that the USA and the global capitalist free market system are built on freedom of choice, people are now suddenly being denied their freedom to buy and sell the equity they want.
It’s an extraordinary situation. Restricting participation in the market because the interests of powerful banks and funds are threatened.
Again, more than this being an event in the far-off USA, the situation highlights the inequality that defines the modern world.
The US stock market is the largest, most successful money-making tool in the world so if it is rigged in favour of established players, then so is everything else.
It is just so much easier for these institutions to make money than it is for the rest of us.
The system is geared to making the rich richer at the expense of everyone else.
We’ve already seen the impact of this during the Covid-19 pandemic. Despite lockdowns and recessions across the world, the wealth of the world’s richest people has grown by billions.
Oxfam estimates the wealth of the world’s 10 richest men has expanded by over US$500 billion in the past year.
As people suffer, the wealthiest corporations and individuals have only grown massively richer and more powerful.
And the problem can only get worse because that seems to be what the system is set up to do.
Ultimately this is perhaps the deepest problem in the world today. That inequality is rising at a truly spectacular rate.
Covid-19, hopefully, will eventually be a memory. Brought under control by vaccines and treatments.
But if we don’t move urgently to curb the manipulation of the world’s markets, the resulting inequality will create instability and anger that impacts us all for a very long time.
*This is the personal opinion of the columnist.
