In past articles, we have discussed how big-corporations, particularly in the financial industry, put at risk our economy and financial system. Recent events around Gamestop trading, have served as a perfect illustration of the risks and dangers inherent to Big Banks.
Context: There has recently been a frenzy of trading activity in shares of Gamestop. Once languishing in the doldrums, its shares attracted large numbers of short-sellers from institutional investors, particularly hedge funds. At some point, mom-and-pop retail investors realized that they had a big opportunity in front of them. First, they argued that the fundamentals of the business were being underestimated (just like themselves) by the financial elites. Second, they noticed that with such huge short-sale positions, the short-sellers would be made tremendously vulnerable if the shares were to appreciate in value – which would in turn drive up the share price even more. Championed by a hitherto unknown “Roaring Kitty aka /u/DeepFuckingValue”, these mom-and-pop investors bet big on Gamestop shares, sending the stock price soaring.
As expected, the hedge funds and other financial elites who had made the opposite bet, found themselves in hot water. At the start of trading on Thursday, they faced the prospect of tremendous losses, if Gamestop shares were to continue appreciating. As feared, the shares came roaring out of the gate – jumping from $260 to $468, in the first 30 minutes alone. And that is when rules of the game changed.
Robinhood, the most popular trading platform for mom-and-pop investors, announced right at this critical point, that its investors would no longer be allowed to buy Gamestop shares. Not even with their own money. Most telling, they were still allowed to sell their shares, but they certainly weren’t allowed to buy any. The upward trajectory was immediately halted, and the share price collapsed from $468 to $130, within a couple hours. It turns out that if you want to collapse the price of any stock, all you have to do is prevent people from buying it, while still allowing them to sell it.
Within hours, Robinhood found themselves under a huge magnifying glass. Politicians as divided as AOC, Ted Cruz and Elizabeth Warren, all protested the flagrant unfairness of what was happening to mom-and-pop investors. There were countless lawsuits filed, and wide-ranging calls for the SEC to investigate what had occurred. But this was only the tip of the iceberg. Soon, a more dangerous story emerged.
Apparently, Robinhood’s biggest customer, source of revenue, and the firm that processes a lot of their user’s trades, is the same firm that has also bailed out the original Gamestop short seller, manages $35B in investments, and has a financial stake in driving down Gamestop’s share price. With incentives like these, it’s hardly surprising if Robinhood’s restrictions were motivated by Citadel’s larger agenda of depressing the share price, and the levers they have available to pull.
Let me be clear about one thing. I am not here to convict Citadel or Robinhood of any crimes. At this point, far more investigation is required, before we can reach any conclusions on what exactly happened.
That said, any clear eyed view of the above chain of events, can only reach one conclusion. Our current financial and economic system is dangerously suspect. Imagine a world where your doctor has bet a million dollars on you dying soon. Imagine a world where a criminal suspect’s parent is made lead investigator in the case. Regardless of whether these individuals acted inappropriately, any competent person would realize that the system is dangerously broken.
When people repeatedly face conflicts of interest, they will eventually behave unethically to further their own interests. When you have a single firm that takes long-term investment stakes, while simultaneously facilitating retail trading activity as a market-maker and paying retail brokerage firms tens of millions of dollars, unethical behavior will always be a risk. Trying to plug these leaks as and when they happen, investigating every individual case one-by-one, is simply a never ending game of whack-a-mole.
Our economy is fundamentally rigged in favor of big-corporations, and stop-gap solutions will simply not do. The only way to attack the problem is to go to the very source. We need to break up the big Corporations.
We need to break them up into discrete businesses. Each with their own independent CEO and board-of-directors. Each pursuing a single line-of-business. Each free from any conflict of interests, and potential for collusion. Each large enough to run their own business successfully and efficiently, but small enough that they don’t have the power to buy Congress, bully smaller competitors, collude across different market segments, and rewrite the rules of the game. Each operating independently, in a free and competitive market.
Big corporations are fundamentally antithetical to a level playing field. It is time we broke them up.
Outlook Zen 