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Sunday, February 05, 2023
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Is there such a thing as the free market?

Everywhere I go on Twitter, I see a lot of talk about the stock market. It has been inescapable for the last few days. Since my early childhood, I have found the business section of newspapers the most nauseating. It’s not like I have a fear or hatred of math or do not understand the basic concept of profit and loss. I just found it rather muddling early on. As I grew older, I began looking further into how Wall Street worked and right from the get go, it felt morally questionable — in addition to still being quite muddling. My feelings haven’t changed since. 

While taking risks seems admirable, context matters. The folks at Wall Street work to fill the coffers of their already absurdly rich clients — and, of course, their very own pockets too. Often acting like sharks that consume all available fish, they leave any other predators — essentially most of the normal populace — to starve to death. 

Nothing quite sums up the massive income inequality, whether viewed from a local or a global perspective, more than Wall Street culture. In fact, this was the driving force behind the Occupy Wall Street movement back in 2011. With the leading slogan “we are the 99%”, protestors took issue with the gulf in wealth between themselves and the top 1% that control finances on Wall Street. While the protests at the time ultimately bore no fruit, the rhetoric certainly did not die. Many eyes were opened, especially when the elite faced protestors from the balcony of the National City Bank Building on Wall Street, sipping champagne and wearing smug smiles on their faces. In the years since, progressives have directly referenced the elite as “the 1%” and targeted the massive wealth inequality in the form of tax reform. Grassroots level movements around the country have seen a rise in newly elected progressive politicians but the inequality hasn’t lessened. If anything, the ongoing pandemic and the subsequent economic fallout has resulted in an exacerbation of this inequality.

However, in recent days, something quite extraordinary has happened that has propelled the stock market outside the business column and into the mainstream: The Wall Street elites have been outfoxed by those who, for most of their lives, found the riches stashed by the elites far out of reach. There was a forceful redistribution of wealth that, to me, felt satisfying. To understand what really happened, it is important to look at a few things. 

Firstly, we must understand the concept of shorting or short selling. Hedge funds often bet on certain companies flopping and derive profit from their downfall. Taking advantage of floundering companies facing economic hardship sounds morally objectionable to me, but such is the industry. In the context of recent events, the company of choice for investors was GameStop — a chain of brick and mortar stores that sell video games and consoles. With the pandemic limiting in-person shopping experiences and the company not having much of an e-commerce presence, GameStop appeared to be a lucrative bet for investors. The idea was that they could “borrow” GameStop stocks from a broker — with interest — and sell it on the open market at a higher price, with the expectation that the value of the stocks would further plummet. They could then buy back the stocks at a lower price to return to the broker and make a profit equal to the difference between selling and buying price — minus any interest incurred and/or commission to be paid. When done in tandem, investors can suppress stock prices and make great profits, driving companies to the ground along the way.

However, this does not need to happen. Considering the investment is dependent on pure speculation, there is infinite risk attached. Rather than plummet, prices could rise indefinitely and leave investors facing substantial losses. In the case of GameStop, this is essentially what happened. 

The cause of rapid upturn in GameStop stock prices: Reddit.

There exists a subreddit called r/wallstreetbets — which has gained about six million members, even going private for nearly an hour due to difficulties handling a surge in new members — that focuses on investing in the stock market. Members of the subreddit are typically ordinary day traders with just about enough money in the bank — and certainly enough courage — to make risky investments. Members in this subreddit were able to notice professional Wall Street investors banking on the fall of GameStop. In fact, they had caught onto something rather remarkable: The expectation of GameStop’s failure was so rife that short interest — the number of stocks shorted but not closed i.e. sold but not yet been bought back — exceeded the total number of existing stocks i.e surpassed 100%. Some members in the subreddit realized that if they bought the stocks at the current low price, they could exacerbate a supply-demand gap and cause stock prices to rise. This, in turn, would cause a short squeeze — a situation where investors try to buy back stocks in order to limit damage — which would only cause the stock prices to rise and swing the profit pendulum in the Reddit investors’ favor, directly taking away from Wall Street. 

The effects have been seismic. Melvin Capital, a hedge fund, was forced to close out its GameStop position at a massive loss and with an infusion of $3 billion from Citadel and Point72. It is estimated that collectively, GameStop short sellers lost about $5 billion this year — with profits instead reaching the hands of the Reddit investors. A similar squeeze can also be seen in stocks of companies like AMC Entertainment — which runs movie theatres and has been hurt by the pandemic. The squeeze appears to have saved AMC from a shutdown, while a slew of posts appeared on the subreddit about how the cash influx was life-changing for the redditors. Posts asked about donating swathes of the cash to charity — a stark contrast to the Wall Street elite that often dodge taxes, let alone engage in philanthropy. 

In many ways, this is a victory for the 99% over the 1%, for the commoner over the rich. The sweetest part of it all is that they exploited the infinite risk that comes with shorting fair and square, in many ways living up to the advice of investing money often patronizingly given by the wealthy elite. It served as revenge after years of mistrusting those that run the show on Wall Street and were responsible for the 2008 real estate crash — and subsequent global recession. Events that proved damaging for the commoners and their families.

However, not all is rosy in this David versus Goliath tale. Brokers like Robinhood retaliated to the workings of the free market by breaking the golden rule of a free market: they regulated trading on their platform. Robinhood prevented traders from buying stocks in GameStop on Thursday, Jan. 28, directly infringing on the Reddit traders’ right to buy stocks in the free market ecosystem. The restrictions were partially lifted in a day, as Robinhood allowed “limited buys'' of GameStop and AMC stocks Friday onwards. The forceful restriction on Thursday helped the prices of the stock to drop off a fair bit — albeit still not enough to turn the losses around — while the partial rollback of restrictions resulted in prices rising again the next day. All of this didn’t do Robinhood’s public image any good, sparking a class-action lawsuit against them and massive backlash across the political aisle — from progressives like Rep. Alexandria Ocasio-Cortez (D-NY) to conservatives like Sen. Ted Cruz (R-TX). A statement was also released by the Securities and Exchange Commission on Friday, saying it would “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

The future remains uncertain and fortunes could swing either way in the coming days and weeks. While this has been perhaps the most comprehensive transfer of wealth from the rich to the comparatively worse off, it also exposed a real and rather unfortunate truth — the free market is a lie. While there exists a free market on the surface, the reality is that it is a playground only for the elite. The backlash aimed at the redditors and the action taken to shackle them the moment they partook in the free market is a realization that this system exists only due to exploitation. Despite urging the common man to invest and diversify their portfolio, the elite could not handle being beaten at their own game, resorting to suppression tactics instead. After all, to maintain an elite status, there must be an oppressed class.

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However, the victory remains significant and sweet. It conveys that in unison, even the most unjust systems can be toppled. That is something I can truly get behind.

Anupras is a Senior Staff writer and Sophomore studying Computer Science and Journalism. Is the idea of a free market a lie? Send all comments to opinion@dailycardinal.com

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Anupras Mohapatra

Anupras Mohapatra is a former opinion editor for The Daily Cardinal and currently serves on the Editorial Board. He is a senior double majoring in Computer Science and Journalism. 

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