The GameStop Story You Think You Know Is Wrong

Reddit investors are not new populists descended from the radicals of Occupy Wall Street.

An illustration of a video-game controller
The Atlantic

Updated at 11:02 a.m. ET on February 3, 2021.

The story you might have heard goes like this: A group of regular-Joe traders on Reddit took down a hedge fund by bidding up the stock price of the sleepy video-game store GameStop. Their righteous revolution was briefly thwarted last week when Robinhood, the popular brokerage app, restricted trading because it was secretly in cahoots with the hedge funds. This was an outrage: It was as if, in the matchup between David and Goliath, the magical slingshot stopped firing because it was secretly controlled by the giant. So, right-thinking people on TV and social media hailed the common day traders, demanded prison for various Robinhood executives, and generally extolled the salutary populism of stock speculation and day-trading.

Almost every piece of that story is misleading, tendentious, or totally wrong.

First, are the Reddit revolutionaries new populists descended from the radicals of Occupy Wall Street? No. They’re basically a bunch of dudes upvoting memes with cash. Or, to be more generous, they represent an extremely online evolution of Big Finance itself, a kind of decentralized hedge fund duking it out with other hedge funds. The typical day trader is a pretty well-off man in his 30s, and various reports so far show that some of the Reddit group’s leading members are current and former finance workers, some of whom make enough money to live in gated communities. By using a message board to move markets and cream billionaires, they’ve done something truly fascinating. But while some Redditors made millions recently, the largest holders of GameStop stock, like the giant asset manager BlackRock, made billions. None of this has anything to do with “the little guy”—a moniker that, by any reasonable definition, refers to the roughly 50 percent of American adults with no money whatsoever in the stock market and who probably shouldn’t kick off their investment career by buying into a mania.

Second, when Robinhood restricted trading on GameStop, was it trying to squash a populist rebellion? “I think there has to be an investigation and people have to go to jail,” Dave Portnoy, the founder of Barstool Sports, told Tucker Carlson.* “I’ve never been more convinced about market manipulation and hedge funds controlling the game than today.”

But what really happened had little to do with manipulation or hedge funds. Robinhood just ran out of money. With the sudden explosion in price and volatility for stocks including GameStop and AMC, the brokerage had to fork over several billion dollars to a clearinghouse of stocks, the National Securities Clearing Corporation. But Robinhood didn’t have the cash. So the company restricted trades on high-flyingmeme stocks” for a few hours, while it went out to raise several billion dollars from investors. If Reddit’s goal was to expose the weakness of traditional financial institutions by using Robinhood, the gambit accidentally exposed the temporary weakness of Robinhood by embarrassing the company at its moment of maximal scrutiny and popularity. (Larger brokerages, such as Charles Schwab, didn’t pause buying in the same way.)

Third, is the GameStop saga an example of investing gone right? On Thursday evening, Representative Alexandria Ocasio-Cortez seemed to valorize the revolution, saying, “One of the reasons for this populist rally is that it felt like the first time that anybody was holding these folks accountable.” She went on to ask if the Reddit traders’ brief victory might “change how the game is rigged” and if there might be “glimmers” for an “everyday retail investor.”

But trying to punish the rich by buying and selling stocks all day doesn’t make any sense. We’ve seen over and over and over that most day traders lose money; they routinely get smoked by bigger players. What’s more, it’s impossible to participate in markets dominated by large institutional investors on both sides of almost every trade in a way that punishes the financial industry. Waging war against Big Finance by becoming a day trader is like waging war against the casino industry by becoming a gambling addict. Even if you’re winning, you’re still participating in a broader casino economy—buying drinks, eating dinner, throwing chips to dealers, filling out tables—that, over time, guarantees that the house keeps winning.

Politicians who want to even the playing field for ordinary people should make the political, economic, and moral case for redistributing income to the poor so that tens of millions of people have more money—not for picking stocks, but for spending on necessities or saving or putting into index funds that they think about approximately once a year. That sounds like a lot less fun than joining a decentralized pirate fund to ransack a couple of random hedge-fund positions. But in speculation as in gambling, “fun” isn’t always fun. In the past 100 hours of trading, GameStop’s stock has fallen almost 80 percent.

Who knows where this ends. Maybe in several years, we’ll look back and see that Reddit hedge funds, like cryptocurrency, were the first steps toward the future of decentralized finance. Maybe the phenomenon of finance message boards, combined with zero-commission trading, will funnel billions of dollars to public markets that might have otherwise gone to gambling (or Netflix, or suits), to the benefit of all 401(k) holders and stock investors. Or maybe, after the government sends out another round of stimulus checks, millions of people will feel galvanized by their leaders and media figures to “un-rig” the market by throwing their BidenBucks at random stocks—only to lose their money at the craps table of the New York Stock Exchange. In the latter case, the legacy of this strange populist spasm might be to throw open the doors of the world’s largest casino to a bunch of little fish, ensuring that the sharks of finance win yet again.

*A previous version of this article misstated that Dave Portnoy is the CEO of Barstool Sports. In fact, the current CEO is Erika Nardini.