Social Power in Finance: Of Voices, Tribes, and Games of Roulette
As social media investors sought to buy struggling video game retailer GameStop’s stock, the financial industry pushed for regulation and a cease to mob activity. This twin tale of financial giants and Internet investors finding themselves at a tug-of-war, highlights the toxicity of financial exclusion, raises questions over free speech in big capital, and warns us about the dangers of mob mentality.
Setting the Stage
As 2020 ended, a couple of events set the stage for a financial revolt. GameStop had announced a shift in its executive board, due to a fairly weak economic performance; they hoped new blood injected into its management would turn the retailer’s finances around and make its low stock price of around $15 per share increase in value. In reaction to this, Keith Gill, an individual investor, had suddenly become optimistic around this video game seller, arguing that people should be bullish about the $GME stock, that it could be on the upswing. Then, hedge funds Citron Capital and Melvin Capital, who had seen the fiscal prognosis for GameStop, decided to short, or bet against, $GME. People on the Reddit page r/WallStreetBets noticed this action and decided to rally around this stock, AMC, BlackBerry, among others.
So the Redditors took to an app called Robinhood that had, at its core, been an easier way to buy and sell stocks, accessible for all. They begin to buy $GME and $AMC quickly and massively, making their price skyrocket, rising nearly 1,000% in two frenzied weeks. It went from being $42.59 per share on Jan. 22 to $96.83 per share when the market’s bell rung for closure on Jan. 25th, reaching the jaw-dropping – in terms of share average – selling price of $483 per share at the movement’s peak. But as the old adage – and law of nature – goes, everything that goes up must come down, and this also includes artificially raised financial holdings. Robinhood announced that it would limit its financial activity, claiming investing flurries were making markets volatile. In truth, they did not have the financial resources to invest in the name of all share buyers, due to an excess of demand, which raised the fury of many and causing the frenzy to go down.
What Does It All Mean Going Forward?
Social media, through Reddit, has just proven that it can conduct the same techniques Wall Street’s financial giants use, in a sort of Promethean fire stealing, so to speak. Drastically different to the norm, where the financial system is locked to a techno- and aristocratic few, these actions display the anger of people wanting a slice of the (fiscal) pie. As a result, much of the financial establishment is panicked at the prospect of coordinated action in trading, arguing that it is an instance of unnatural meddling in the market. So much has the change impacted the technocratic world of the NYSE, that as soon as the frenzy died down, finance’s powerhouse firms – long reluctant of government regulations – immediately reached out to President Biden’s administration to help curb these coordinated financial actions.
But is social media a threat to financial markets? I would argue that it isn’t, because individual’s gains from the frenzy were somewhat modest, and while hedge funds involved lost massive amounts of capital, the impacts of the frenzy were but a drop in the total amount of capital the financial system moves around constantly. More than an assault on the markets, this episode represents the extent to which the excluded masses can voice their preferences in this financial system, and the consequences of making investments either like a tribal pursuit, or a game of roulette.
Finance’s a Company, Reddit’s a Crowd
Because Reddit, Facebook, Instagram, and so on, are by definition a network of people, translating messages, ideas and organization, it could be argued that they are conduits for direct democracy. These mass communication platforms can make thousands fall in line with a single course of action or can engage debate between its users. But if Robinhood, Wall Street, or the federal government decide to block the social media group’s investment coordination, in which they exercise their right to express confidence in a firm, would this be in violation of their right to free speech?
It can be argued that it would be, that finance is a marketplace, moved by funding wherever that comes from. After all, letting investments flow is a core tenet of capitalism itself, why wouldn’t it apply to stocks? On the other hand, there are incentives to block malevolent coordinated actions, especially if these have their basis on provoking economic and financial chaos. Social media might have experts among them, but they are not technical platforms themselves, leading to amateurism and being out of their water – or being maliciously decided to make firms lose money.
Pokemon Go (To The Stocks?)
Just about anyone can join these drives. Therefore, it could be easy to point to some stocks and tip people to invest in them massively. Crowd action of this sort presents some positive opportunities, in that people can give starting companies a boost, or make companies grow by expressing confidence in them.
However, the problems that coordinated action, especially through the impulses of Reddit, Instagram, Twitter and related rapid-fire agglomerations of people, can be quite a few. Mob investment could be a potential leap from the social networks since mob or tribal behaviour is significantly more instinctive and impulsive than individual behaviour. Market manipulation of this kind can be genuinely problematic if the origin of the investment drive gets lost in the crowd. A big problem for social media-influenced investment would be that investors would not be able to determine the interests and motivations of the advice-givers, if these give nebulous advice to benefit themselves at the cost of novice, inexperienced shareholders looking for fast benefits.
Another dangerous facet of social media in financial markets is its ability to very effectively create market bubbles. The hype and excitement that a few advisors could produce might inflate a stock unsustainably based off of services that are not up to par, a dangerous proposal. People got (justifiably) upset when Wall Street packaged together subprime mortgage bonds – read: junk bonds – and sold them off with high credit ratings, making fortunes for hedge funds in the process. Now social media investors could well go down that exact same path – of artificially inflating securities until they collapse, for a profit. It would then issue us the question: who should get to gamble and profit, if anyone at all, should this financial system become a casino?
I would posit that the problems with social media in finance can turn out to be remarkably alike to the problems of social media in political democracy – highlighting human flaws, class conflict, opportunism, and inclusion. Social media is a market, trading ideas, emotions and behaviours like the stock market trades indices and values. Like all assemblies of humans, both need rules, and for rules to be created there needs to be government. Excesses of censure, exclusion, gambling and power need to be curbed if the relationship between society and finance is to remain a healthy one. Money can drive the world, but ideas can change it.