GameStop and the war on Wall Street | Opinion

The war to redefine reality has spread from politics to finance. When an army of Reddit traders launched a surgical attack on Wall Street, their motives were twofold. First, they wished to show that financial markets had long ago become disconnected from reality. A new generation of traders, many raised in crypto markets, understood this better than anyone. Financial assets have no intrinsic value. They are worth what people are willing to pay. The Redditors would argue that it was always thus but that the truth was carefully hidden by those who, powerful enough to create their own version of reality, were able to impose it on everyone else.

That takes us to their second motive. The GameStop gambit amounts to a declaration of class war on Wall Street. This war is about not just wealth and power but also about what lies at the root of both: the ability to create new realities. In contemporary capitalism, economic relations rest upon actual control over the memes of production.

Short sellers borrow and sell shares in the expectation that the price will go down, so that they can buy them back at a lower price and return the borrowed shares. Are they making a bet on the fundamentals of the stock? Not always, and not exactly. Reflexivity is a powerful market force: By selling stocks, you bring the price down in the short term, and if other market players get spooked by the drop, they will sell, too, and the process feeds on itself.

» READ MORE: GameStop’s business brisk amid stock price madness, Wall Street hedge fund closures

The opposite can also happen. If other players decide to buy, the price will rise, and investors who are short must scramble to buy shares and cover their positions to limit losses. Called a “short squeeze,” this was the predicament in which Melvin Capital, the hedge fund on the wrong side of the GameStop short, found itself after the Redditors planned and executed a buying spree. There is no buying force in financial markets —there probably is no force in the universe — more powerful than panicky buying by those forced to cover short positions.

When the plan first emerged on Reddit, a trader going by the username Jeffamazon pointed out that GameStop might not be a “trash stock,” but he also noted that that was not really the point. The short sellers had artificially depressed the price; it could just as easily be artificially inflated. What mattered was that GameStop had an 85%-99.8% short interest, with only 50,000 shares available in liquidity, making the shorters extremely vulnerable to any changes in price. This was a contrarian bet, and the conspiring traders were ready and willing to apply the squeeze until Melvin was swamped by its losses. Reports in the media this weekend claim that Melvin lost 53% of its investments, a $4.5 billion loss. As Jeffamazon put it in the original Reddit post: “There is literally no historical precedent for this. I just know things are about to get very insane.” He concluded, “The only way to beat a rigged game is to rig it even harder.”

What happened next was extraordinary. The foundations of the whole system suddenly seemed to wobble. Commentators rushed to condemn a group of investors for the sin of not caring about the inherent economic value of a company — as if Wall Street itself had not long ago moved beyond such metaphysical motions. Just as Twitter, Facebook, and Amazon had rushed to ban versions of the world they saw as dubious only a few weeks ago, financial institutions ranging from the Securities and Exchange Commission to the online trading platform Robinhood were now being called upon to restore order and truth.

» READ MORE: After falling back, GameStop climbs again as populist trading roils Wall Street

Robinhood halted trading in the short-squeezed stocks, perhaps to abide by capital requirements. But that only raises the question of why the system, even with no nefarious intent, always seems to work to preserve a particular class of investments from undesirable outcomes. In his interview with Elon Musk on Clubhouse yesterday, Robinhood CEO Vlad Tenev stumbled to explain what happened: There were several calls in the middle of the night from the National Securities Clearing Corporation requesting a $3 billion deposit, then lowered to $1.4 billion and finally $700 million after Robinhood agreed to limit trade in the volatile stocks to position closing only. Musk then asked “who controls the clearinghouse,” to which Tenev could not give any answer.

Clearly, something fundamental has changed. Virtualism has won. The same processes that have been undermining the sense of a shared reality in American politics over the last few years are now doing so in financial markets. The Redditors were not interested in GameStop stock insofar as it represented a company that sells items to turn a profit in the physical world. To them, the stock was merely a token to use in certain applications — for example, a short squeeze. And if enough people agree that this token is a store of value, then it becomes a store of value, even if by chance the underlying company were to disappear. Think of Bitcoin, a financial asset with no cash flows.

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The Reddit traders — the mob — do not seem to have any philosophy of valuation. Does that make them immoral? Some, hilariously, have argued precisely that on network television. Does this make the retailers naïve? Well, many increased their net worth from $50,000 to $20 million or $30 million. What it really shows is that they understand the secret of modern capitalism — a secret that until now has been reserved for a happy few.

Bruno Maçães is a senior fellow at the Hudson Institute and the author of History Has Begun: The Birth of a New America. A version of this piece originally appeared in City Journal.