Financial Hackers

In the fantasies of many, this is an event long awaited.

Until today just a fantasy, because the real problem was to be able to find a network of people interested, prepared and willing to do anything to pursue a dream.

Today someone has done it and by far. Probably it should have been done long ago. This is one of the new ways of conducting a war, where money is the bullets, and those who have a few must use them with precision and coordination.

You know "Trading Places"? The Christmas movie starring Dan Aykroyd and Eddie Murphy, where the two protagonists manage to drive the two wickedly rich Duke brothers out of business with an ingenious financial trick based on stock market speculation? Well, in the last days not only something like that happened, but it happened on a large scale, involving hundreds of thousands of people and having as the object of speculation something as trivial as that of the film: in "Trading Places" the speculation was about orange juice concentrate, in reality the target was "GameStop", the American network of videogame stores. Make yourself comfortable, popcorn at hand, because this story is crazy, unexpected, funny and, above all, enlightening.

Speculations like the one recounted in the aforementioned Christmas movie are called "short selling". In practice, speculators bet on the value that the shares of certain companies will have in the future, trusting, for example, that the price of X shares will fall for some reason. On the basis of this bet, they sell those shares (without yet owning them, having only borrowed) at the price they have at that moment, as if they had already bought them, and commit to pay the price that the same shares X will have at some time in the future. In fact, with short sales, first you sell at the current price, and then you buy at the price they will actually have in the future. If the bet was right, i.e. if the X shares really lose value, the speculators, who had already sold them at a certain price, say 100, will buy them at a lower price, say 50, at which they had promised to buy them. So at the end of the day, the speculator has spent 50 but cashed in 100.

It is not a crazy system, it is exactly how finance works: neither more nor less than a giant casino.

So far these speculators were essentially large investment funds, able to move billions of dollars on the stock market: when they move and make bets they are unstoppable, caterpillars that with such moves heavily condition the stock market and the so-called real economy. In fact, if the shares of a company lose value it is because that company is supposed to go badly or is about to go badly. Speculators don’t care of that, since they are not interested in the real object they are buying the shares of, but only in their bet on the future value of those shares.

Pure gambling, disconnected from the world of real companies.

It is obvious that if the manager of a large investment fund bets billions of dollars on the fact that the value of certain shares may fall, it creates a very strong interest for their value to fall actually.

Now, if you were one of those managers, and you had placed a billion dollar bet, would you stay in your office trusting in good fortune or, having the means, would you rather try to "convince" in various ways (more or less ethical) other managers of the same stock market to sell the shares X that they own, thus decreasing the price and increasing your profits? In any case, both you and them are in the business, and perhaps in the future you will return the favor. If there is someone who gains in a bet, there is always someone else who loses, and there will always be small size investors; because the "small fishes" are very numerous but each one thinks for himself: not organizing themselves as a single coordinated force, they can be eaten by the big ones.

Or can they?

It all started with Reddit, a social network very popular in the US. Unlike Facebook and Instagram, Reddit vaguely resembles the old forums of the prehistory of the Internet (BBSs, for those who were in during the '90s), and is divided into a multitude of thematic sub-forums, called subreddits. There is a subreddit where we talk only about cinema, one where we talk only about fashion, one for US politics and so on; if something exists, and interests at least a few thousand people, it is very likely that it has its own dedicated subreddit.

One of those subreddits is called r/wallstreetbets and it's a forum for small traders, who buy and sell stocks in small amounts, often via some app, and who exchange opinions through the subreddit's posts. A few weeks ago someone on that subreddit notices that there is a big short sale going on involving GameStop, something everyone on r/wallstreetbets knows, and the bet on its future loss of value is based on the idea that between lockdowns for pandemic and expansion of online platforms, a bricks and mortar store like GameStop is doomed to fail. Sort of Blockbuster vs. Netflix. Damn speculators, someone comments. After the financial crisis of 2007-2008 none of them paid for their shameful acts, someone else commented. Yes, we should really make them pay, say others. And here comes the quantum leap: they start saying "but then let's make them pay!". How? Simple: by making them lose the bet. Big speculators have bet huge sums on GameStop's stock losing value? So we're going to make them raise in value! So when those overpaid managers have to fulfill the contract they made and buy the shares they've already sold, the price they'll pay will be so high that we'll get them out of business. So, without any manager at the top of some investment fund having decided it, an avalanche of purchases begins: first hundreds, then thousands, then tens of thousands and finally hundreds of thousands of people read those comments and decide to participate: they all buy GameStop's shares and by the law of supply and demand, when everybody wants something, the price goes up. And it goes up a lot! The thing is so fast and sudden that it takes by surprise the big speculators, who suddenly realize with horror that they are about to loose billions of dollars. What follows is an unprecedented psychodrama.

With GameStop's stock price taking off, in fear of losing all their money and ending up literally bankrupt, the big speculators do the only thing they can: they start buying too. The idea is that if the price continues to rise they can then resell, make some money and at least partially cover their losses. The only problem is that now ALL the players, both small and big, are buying, so the price is skyrocketing: in less than two days it went from $30 per share to over $350 per share, with a 600% increase in a few hours. In technical jargon this is called "short squeeze": the small fishes are crushing the big ones to death, beating them at their own game. Now the big fishes are watching, trusting in good luck. The small fishes are trading small, each putting up a few hundred dollars, and often via apps. Suddenly one of these apps, one of the most used in this story, decides to prevent its users from buying more GameStop stock. Shortly thereafter the same app seems to start forcibly selling off its users' shares in order to drive down the price and save the big speculators. But the power of small fishes is numbers: first the American parliamentarians are bombarded with messages in which furious users denounce the abuse, then more than a million of them flock to the app's page and assign it the lowest score, making it drop suddenly to the bottom of the charts (which must have really alarmed someone at the top, since Google decides to delete more than a hundred thousand negative reviews) and finally they join in a class action against the company that manages the app. In the meantime, investment fund managers realize to their dismay another problem: in the moment of total panic, they sold more shares than those available on the market! In other words, if no one of the little guys sells his shares to them, they will have to return the money they got from the short sale, compounding their losses even more. Finally, the nice touch: one of those managers appears, furious, in a TV interview complaining that what happened is wrong, that it is not fair and it’s a shame that financial market is not regulated. To his misfortune, the journalist does not resist and reminds him that it was them, the big speculators, who had been working for decades to dismantle any regulation of the financial market. Why have they now changed their minds?

After all, these people are doing exactly what they have always done. So what is the problem? "This time we are the ones who will lose out", the manager replies candidly, surprised that the journalist does not understand that the purpose of the system has never been the free market, but the maintenance of their privileges.

The story is still in progress, let’s see the ending.

By now the precedent is set.

To be continued...

(thanks, Giuliano)