The Dark Side of the Moon

The GameStop /r/wallstreetbets story took over the internet last week. On Lotuseaters.com, the Diamond Hands to Mars analysis was published to provide readers with an overview of the situation. The piece recounted the damage done to several Wall Street-based institutions by retail investors with /r/wallstreetbets at the helm. Tens of billions of dollars are on the line and billions have already been lost. In addition, the event has shown that when rallied behind a common goal and when the circumstances are right, small-time actors in the market are not altogether powerless against large institutions. It also exposed the willingness of these entrenched players to use their social and political power in a blunt and naked way when their bottom line is challenged.

However, there are also negative consequences of the GameStop short squeeze. When this battle of wills ends, history will not end with it. The fallout is likely to be both long and significant for retail traders and non-institutional individuals who have limited capital to work with. Lotuseaters.com have spoken with Robert, a member of the community who makes a living through retail trading and who wished to remain anonymous. He has outlined several reasons why people like him, despite their moment in the spotlight, are likely to be the ones to suffer the most as a consequence of the GameStop saga. 

The history of retail involvement in the trading market is fraught with abuse by the regulators acting on behalf of the big players. In the name of protecting “amateur” investors from excessive losses, they have been making it ever more difficult for retail to operate in the market as easily as Wall Street. Underscored by recent events, it is increasingly more clear that the ‘protection’ justifications are simply a façade to tilt the playing field towards one side.

Robert recounted how in the last several years, the legislative push against retail traders has been intensified:

“Before August 2018, us ‘stupid amateurs’ had access to the same markets and instruments as the ‘big boys’ … Then the European Securities and Markets Authority decided to introduce new rules to ‘protect’ stupid amateurs and ended up devastating the [retail] industry (and similar things happened in the US, who have even stricter rules than the UK).”

“From that date, all traders were split into two classes with different rules for each class. To continue trading as we had before, we needed to apply for a ‘professional’ account … The general requirements were having holdings of over £500,000 (!!), already working for a financial institution in a trading capacity, or making trades of ‘significant size’ - at least 10 trades per quarter (£50,000 per trade). In addition, you had to be prepared to divulge your trading history with evidence of your wealth and assets, a massive breach of privacy.”

“Among the many new restrictions was the amount of leverage we could have (how much we could borrow to trade), fewer assets available, some types of trades no longer available (such as Binary Options trading, because ‘stupid amateurs’ were making a fortune out of them), and negative balance protection, which meant losses could no longer function as a tax offset like they do in a normal business. Of course, none of this affected the ‘professional’ traders, just us. The new laws meant it was much easier (for us) to go broke quicker and give our money to Wall Street. They even had the cheek to say these new laws were ‘for our protection’!”

The ‘game’ played in the stock market is not fair, and perhaps has never been fair. When Wall Street and the regulators become, through open ‘cross-pollination’, one and the same, certain players in the market become the rulers of this market as well. Expectations of fairness from one side towards the other, then, become wishes for miracles. Instead, others involved in the market are left with the necessity to find their own way of navigating the ‘polluted’ waters, which have no chance of becoming clean again, to make their business model work. 

Robert adds:

“There’s so much money in the system and [the big players] are so powerful [that] they will always win, and they will always get their way. Look at the various crashes over the years - they still made profits and not a single one ever went to jail.”

“You have to accept as a retail trader that this is their game and they just allow us to play it with them. As a retail trader, we just have to see which direction the shark is swimming, hop on for a bit, have a little nibble and then drop off again before the shark changes direction.”

“It’s a s****y rigged game, and always has been. To be a successful trader you need to emulate the institutions, not fight them.”

If not making big waves and being content with one’s lot is the way to play the game for retail traders, what is the GameStop wave going to result in? Despite staggering figures of money in play in the short-squeeze at the moment being cited, this is only a tiny part of the financial or hedge fund industry, which is unlikely to suffer much overall as a result. Talks of this event, if continued, inducing an overall market crash are likely to be just sensational exaggerations. Although many of the large market players are financially interconnected and reliant on one another causing more to be exposed to risk when one ‘gets in trouble’, the size difference is simply overwhelming. “I wouldn’t be surprised if one large bank had more money than every retail trader in the world combined. I think just hedge funds alone, there are over 7,000 in just the USA; god knows how many there are worldwide,” Robert adds.

The present push against several hedge funds, most prominently Melvin Capital among them, is unlikely to cause any real damage to the financial establishment, even if it might have an enormous potential to raise awareness and become famous in the grand narrative of history told through the lens of class divisions. Robert argues that in this David vs Goliath fight, Goliath always wins:

“[/r/wallstreetbets] are laughing because they managed to fire an arrow at an army that has nuclear weapons.”

As it stands, it might be impossible for /r/wallstreetbets to avoid ‘punishment’ by Wall Street for daring to not do what they were supposed to. Such punishment might take many forms, although a straightforward monetary loss is likely to be the most prominent example. Almost everyone seems to be in agreement that most GameStop holders and traders are going to lose money in the end. There will be a lucky few who will make (quite a lot of) money instead, of course - though those might be some of the better-connected traders, operating in the space ‘between’ retail and Wall Street.

Still, for those on the subreddit and beyond who see this ‘fight’ as personal, taking part primarily for the gesture and the “f- you” it is against people they hate, the monetary losses might not matter at all. These individuals will go down in flames proudly. Overall, though, no one can say how large the portion of GameStop investors who do not care about the money really is. Although many were saying so while the price was up, that is a difficult view to maintain as one sees the numbers going red.

In the ‘fog of war’, it is not clear whether Wall Street will have ultimately made a net loss or gain from the GameStop squeeze. One thing is fairly certain, however. For some time, it seemed to the public as if /r/wallstreetbets could pose a real threat to some of the big players. Such a realization can never be undone. It will become a powerful motivator for all those wishing to stand up against what they perceive to be grave injustice. The vulnerabilities of Wall Street became exposed for a short while and the aura of invulnerability has been damaged.

That the events cannot be undone is true on the flipside, too. Among others, hedge funds manage the investments of regular people, innocent and uninvolved in all this. If /r/wallstreetbets managed to damage or expose the vulnerability of some of them, this will not be allowed to stand. If the subreddit and the retail investors they inspired succeeded in taking some hedge funds down altogether, it would mean these regular, uninitiated people losing their savings.

“Take down a hedge fund and everyone who invested in it loses, not the hedge fund. For example, a hedge fund can keep losing money for over a year and still profit. They still get their commission regardless of how well they did. They’re insured also by their banking buddies, so they always win no matter what,” says Robert

What is more, the prospect of those losing money from all this being innocent ‘bystanders’ will create a justification for a strong counter-reaction by the regulators. Acting, as ever, on behalf of Wall Street against others, they will have gained a powerful argument for making sure retail is not in a position to challenge the hedge funds ever again - not for Wall Street’s sake, but on behalf of your parents’ savings, of course. 

This crackdown on retail traders is probably inevitable now. There is nothing /r/wallstreetbets can do to make it less likely. The genie is out of the bottle and it cannot be put back in. There is an argument to be made that the gradual tightening of screws underway before the GameStop squeeze would have continued either way - that all an ‘uprising’ like this can do (while at worst speeding the process up a little) is to draw more attention to the field and expose its corrupt operations to the wider public, providing at least a small, unlikely chance for a reversal of course. While we cannot yet tell whether there are any prospects of this actually happening, the ‘speeding up’ of the descent into ever-more harsher restriction upon, and worse conditions for, retail traders might already be underway.

And Robert agrees. In his eyes, this negative fallout is now almost a certainty. While /r/wallstreetbets might reach the moon, there is a dark side of the moon as well:

“Us little guys will be getting shafted because of this for a long time to come, long after everyone has moved onto something else. I’m glad this happened, as it’s shone a torch on the shady practices in the industry. But we’ve been suffering this crap for years and after this, it’s only going to get worse.”