The recent GameStop frenzy showed how much US retail investors are prepared to lose to make Wall St burn. But are New Zealand investors motivated by the same activist zeal? Michael Andrew asked the founders of Hatch and Sharesies.
There are many things in life that are very easy to dislike. For some people in the US, Wall Street may be near the top of the list. It’s easy to see why. After multiple decades and recessions, countless vilifying movies and books and even more accusations of tax-avoidance by Bernie Sanders and representative Alexandria Ocasio-Cortez, some Americans have come to see Wall Street institutions as monstrously venal and depraved, made up of an elite and privileged 1% cohort constantly robbing taxpayers to fill their trillion dollar coffers, which are then used to pull the strings of whatever puppet president has been installed to give voters the illusion of control.
While this rudimentary image may be overly dramatised by the media and movies, Wall Street is undoubtedly flawed and culpable in its fair share of economic atrocities, and the much poorer people on the receiving end are legitimately angry. This long-simmering rage began to boil over earlier this month, when retail investors, coordinated through Reddit forums like WallStreetBets and armed with mobile investing platforms, began routing Wall Street hedge funds by bulk purchasing shares in loss-making company GameStop. The value of the shares soared, forcing the Wall Street hedge funds, which had bet on the stock value to drop (shorting), to spend billions covering their losses in what’s known as a “short squeeze”.
On social media, it was quickly revealed that much of the retail investment wasn’t so much to make money, as to deliberately spite the maligned Wall Street hedge funds. However, when Robinhood – the app on which much of the GameStop shares were being bought and the self-marketed antithesis of Wall Street – was forced to halt trading because it didn’t have the capital on hand to guarantee the volume of purchases, it gave the enraged retail investors further proof that the game was rigged, there was an egregious bias, and grassroots investing apps like Robinhood were as much a part of the corrupt system as the elite institutions.
The outrage essentially boiled down to one question: How come elite hedge funds were allowed to game the system with impunity, but when everyday retail investors did it, it caused a regulatory uproar?
After trading of GameStop stock was halted, the value plummeted, resulting in significant losses for many traders. Those who didn’t sell while it was up resolved to hold onto it with “diamond hands,” in an all-or-nothing attempt to keep it from the hedge funds.
Although New Zealand seems far removed from the madness and Wall Street hatred, the whole saga has had impacts on investors here. Both Hatch and Sharesies, New Zealand’s main investing platforms, saw a significant amount of GameStop stock purchased through their platforms. Both experienced delays and were forced to issue notices abut trading halts in volatile shares including GameStop Corp, AMC Entertainment Holdings Inc and Nokia Corporation, much to the consternation of some customers. However, much like the US platforms, the trading halts were imposed on Hatch and Sharesies by DriveWealth, the US broker they purchase through. Both DriveWealth and its own clearing house required a significant amount of cash to reflect the higher volatility of the shares, the two days it takes for the money to clear and the increased risk of default.
While both Hatch and Sharesies have come in for criticism on social media, each have been unequivocal that the trading halt was not their choice.
“It’s very stressful,” said Kristen Lunman, co-founder and general manager of Hatch. “And obviously it’s shitty, because it was terrible timing when the shares dropped in value. But there’s lots of regulations everyone has to comply with.”
Although both platforms don’t recommend speculative day-trading, and instead encourage diverse, long-term investments, it’s important to note that Hatch and Sharesies were created in a similar spirit as Robinhood – almost as an antidote to the financial monopolies; to democratise investing and take the wealth-creating power away from the elite institutions and give it to the people. So did the founders of the New Zealand platforms ever anticipate the tools being used to fulfil such a vendetta?
“I’d be lying if I said I did,” said Lunman. “But with respect to Wall Street, it’s a throwback to 2008 and some of it is real anger. Some people were really hurt by the global financial crisis and are taking it quite personally.
“This type of thing isn’t new. There are stock run ups all the time and quite often it’s the big Wall Street whales or hedge funds that are getting in on it; often the retail investors are left holding their hats. But this is the first, almost populist movement fuelled by the internet, and there’s no way I would have anticipated this.”
In a feature earlier this week, The Spinoff reported that some New Zealand investors bought GameStop shares in order to “stick it to Wall Street”. While Lunman says there are certainly traders with that sentiment, many of them were simply opportunistic and looking for a way to make easy money. Either way, she said it’s not Hatch’s job to dictate to people how they can or can’t invest.
“That isn’t really our job. All we needed to do was open it up and democratise it and recognise that 99% of the people truly wanted to build long term wealth and simply wanted to access awesome companies and funds, and just sit on them for years, if not decades.
“You’re always going to get that 1% or 2% that are going to use it in a way that wasn’t quite the original intention, but it’s not really our job to judge. We provide access and education and it’s your responsibility as a self-directed investor, to decide how you use it, as long as you’re aware of the risks.”
While the behaviour of the WallStreetBets investors has an anarchistic tinge to it, it’s not all driven by a desire to simply watch Wall Street burn or for personal gain. One Hawke’s Bay-based investor is using his GameStop profits to donate $5000 worth of Nintendo Switch consoles and games for children in hospitals going through cancer treatment.
“GameStop is a video game selling company and I thought it’d be poetic justice for the hedge funds on Wall Street to pay for some Nintendos for those battling in hospital,” Morris Lazootin told Hawkes Bay Today.
According to Leighton Roberts, co-founder and “3EO” of Sharesies – which saw 12,000 GameStop investors and $20m worth of trade – the GameStop traders generally fit into three categories: “The first is people who are fully aligned with the purpose, understand what’s happening, and want to screw the shorters,” said Roberts. “The second is the eyes wide open, looking to take a punt and make a bit of money out of it, but realising that they might lose. And the third one, and this is where the biggest risk is, is the people hearing about it or seeing it in the media but don’t really understand that they might lose money on it.”
Roberts understands why the mechanisms are in place to halt trades of volatile stocks. “The reality is it’s a very important part of the safety of financial markets, some of those things. Although I think there is a question whether some of them could be modernised now.”
The substantial losses incurred through the GameStop frenzy – for the hedge funds and the retail investors – will likely prompt US lawmakers to ask whether more should be done to prevent such internet-fuelled speculation in the first place. Robinhood has been subject to multiple lawsuits since the trading halt, and its CEO Vlad Tenev will be testifying before the House Financial Services Committee on February 18 about his company’s role in the rally.
Whatever the findings, the whole saga has illuminated a frustrating reality for activist investors: the tools and apps on their phones may have allowed them to play, but it is still very much Wall Street’s game.
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