What are the financial markets? Where are they located?
A financial market is a marketplace in which financial assets, such as shares, debentures, bonds, futures, currencies, etc., are generated and exchanged. It plays an important role in allocating limited resources to the economy of the country. Through mobilising funds between them, it serves as an intermediary between the savers and the investors. The stock market offers a meeting platform for buyers and sellers to exchange assets at a price dictated by the powers of demand and supply.
The stock markets are virtually accessible to everyone irrespective of a person’s geographical location.
What are we talking about today?
Wall Street’s echo chambers are still emerging from the dramatic events of January 2021. In this scenario, the protagonists are r/wallstreetbets, an anonymous forum on Reddit, the social media site. The group consists of institutional investors (individuals trading stocks) who have purchased both stocks and options using online commission-free applications such as Robinhood. GameStop, an American gaming department store that sells electronic gaming equipment, accessories, and merchandise, is at the centre of the drama. The pandemic had further affected GameStop, whose physical store model had seen a downturn in its fortunes in the midst of rising online gaming transactions. Melvin Capital and Citron Research’s Wall Street hedge funds were targeted towards short-selling GameStop stocks.
What is short-selling?
Short-selling is the act of borrowing stocks to be sold on the market, betting that, in effect, the stock’s values will fall, meaning that the decreased value of a given stock makes a profit. By arranging a “short squeeze” through their party, members of r/wallstreetbets had other plans to purchase GameStop stock, resulting in the price of GameStop stock increasing at one point by almost 2,000 per cent. The hedge funds, which suffered massive losses, sought to protect their positions, buying back their stock at increased rates, obtaining financial bailouts from industry insiders. A “Gamma squeeze” by r/wallstreetbets followed, causing the hedge funds to incur greater losses. Another tactic used to shore up rates is gamma squeeze by previously acquired options that come at a fixed cost and can be exercised within a specific time frame by investors.
Individual derivatives trading, enabled by these apps, suddenly saw its advocates calling for strict regulation in the establishment. Some circles are hinting with a wry smile at the same time, almost seeing it as a revolt from below that has succeeded in humbling Wall Street. Others have started to herald the political upsurge that marks the moment. These reactions may provide comfort to the millions in the U.S. who have faced the consequences of the 2008 crisis directly or indirectly. However, with an unrestrained financial environment unapologetic, this moment seems to have more insights than answers, even after generous state bailouts.
Who are these Redditors, and why is their tale gaining ground?
It is loud and clear that activities such as short selling, which are common on the market, are tools that are deceptive, pointing to a rigged game, as the Redditors have shown, where stock value is most often exploited by those who have access to capital.
The Redditors’ “short squeeze” using mutual access to capital to ensure an unusual increase in the stock of a fledgeling business offers an exception that seems to prove the law. Although the GameStop incident ensured losses suffered by some hedge funds, it created windfalls for other large investors holding GameStop stock, including Black Rock, a major asset manager, who held a 13% stake. This raises the question: In this game, what role do retail investors play? Although the “guerrilla” behaviour of GameStop expands our imagination into new possibilities, the game is still played with great and intelligent money and resources to help them. In fact, retail investors and the financial revolution of app-based brokerages like Robinhood are helping to ensure market liquidity.
In addition, consumer data from these apps feed into data analytics to assess market sentiment and ensure greater predictability; not surprisingly, because large investors promote most of these apps. Indeed, the drive for individual participation in stock markets is not recent, going back as far as Margaret Thatcher, the free market symbol, referring to each person as a competitor in a competitive market, as part of an agenda aimed at weakening the collective power of the working class.
How are the financial markets related to the concept of democracy?
The Redditors are a motley crew, based on news, at least. Some of them, Republicans or Democrats, who saw adversity after the financial crisis and have strong contempt for the Wall Street elite and were part of the Occupy Wall Street demonstrations, are politically on either side of the spectrum. Flush with stimulation controls obtained during the pandemic, as well as home-bound time, the moment provided an opportunity for such action to be coordinated. There is no question that this action’s concerted and cooperative nature gives rise to potential efforts in the future, maybe allowing for democratic upsurges on similar digital platforms. But in this case, the target may be too high, and it also seems to play into the idea that the system can be fooled into failing in some way. In several respects, in a larger political project that threatens capitalism, this points to a deeper lack of confidence in political organisation. The calls for the democratisation of financial trading may not understand the distorted essence of finance capital, in which debt and inflated value instruments are distanced from real productive value. Industries, households and societies are often victims of financial capital vagaries, which reap gains from real losses.
What remains to be seen is how to react to this moment with money. Circles of government and regulatory bodies are already in place, and calls are being made to limit trade in these stocks. There is little question, however, that this intervention has again brought to light how the millennial generation, battered in its lifetime by two crises in capitalism and a global pandemic not seen in 100 years, is showing alternatives to collective action, either generated by the social circumstances created by the pandemic or by questioning the methods by which governments have tried to protect the capital.