In recent days, the financial world has been shaken by the “Gamestop Short-Squeeze”, a phenomenon which started when individuals on the Reddit forum, r/WallStreetBets, used Robinhood and other trading platforms to buy Gamestop shares (NYSE: GME). A more detailed summary of the event has been excellently written by Quinn Otto-Moudry, a fellow author at The Review, which can be accessed here, so a full description of the squeeze is unnecessary.
What is perhaps even more important than the Gamestop saga itself is the national political response from both sides of the aisle. Robinhood’s abrupt halt of trading for Gamestop, AMC, and other shares drew sharp bipartisan criticism. Representative Alexandria Ocasio-Cortez (D-N.Y.) tweeted, “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” Minutes later, Senator Ted Cruz (R-Texas) retweeted the representative’s tweet, adding, “Fully agree.”
However, other members of Congress used the Robinhood shutdown as an opportunity to advocate for more radical proposals which would effectively erode the free market. Representative Ilhan Omar (D-Mich.) tweeted, “A small tax – 0.1% – on each Wall Street trade would reduce high frequency trading, a practice which drains profits from retail investors and benefits only the very rich,” going on to say that such a tax could help pay for free college tuition. Senator Elizabeth Warren (D-Mass.) suggested that the Securities and Exchange Commission take more action in regulating the stock market, saying “It’s time for the SEC to get off their duffs and do their jobs.” Federal agencies taking more action, usually translates into greater government interference.
Too often, many liberals blame capitalism and the free market for their woes, turning to the government for extra regulation and protection. However, it is important to understand that the Gamestop saga does not serve as a critique of the capitalist system. Indeed, a collection of institutional and retail investors were able to cause short selling hedge funds to lose upwards of $20 billion thus far. Instead, the Gamestop saga and the Robinhood shutdown serve as a damning indictment of cronyism.
Critics of Robinhood’s trading shutdown point to the trading platform’s close relationship with Citadel, an entity which invested $2 billion in Melvin Capital, one of the Gamestop short sellers. Robinhood provides data on its trades to Citadel and relies on Citadel’s “market makers fees” to stay afloat. This has caused speculation that Robinhood may have been pressured to shut down trading of certain stocks, although direct evidence of this remains to be seen. Additionally, it has been reported that Biden’s Treasury Secretary, Janet Yellen, has accepted $700,000 from Citadel in speaking fees. This should cause concern of a conflict of interest should an investigation be initiated into Robinhood and Citadel.
Given the close relationships among Wall Street firms and their close ties to the federal bureaucracy, one should wonder how handing power over to the government would solve the problem of market manipulation. If individuals like Janet Yellen, who receive payments from Wall Street firms, are given the power to create regulations for and lead investigations into the very institutions which they worked for, should politicians like Senator Warren expect a better result for ordinary consumers? Absolutely not. Unsurprisingly, some of the Wall Street elite have begged for the S.E.C. to intervene and “manage the situation”.
Ultimately, greater government interference and regulations safeguard cronyism. Empowering federal agencies to further regulate the market will likely not stop the problem of market manipulation. Giving more power to unelected bureaucrats in Washington D.C. and allowing special interests to influence their decision making may invariably hand more power to Wall Street firms and mega-corporations.
What is a better alternative? It is a freer market, with less burdensome regulations and greater, symmetrical access to information. The advent of social media and more democratized trading platforms have both certainly increased the number of people trading in the stock market. The sub-Reddit, r/WallStreetBets, has attracted over eight million users. It is this increased participation and decentralization, as economist F.A. Hayek points out in his 1945 essay “The Use of Knowledge in Society”, which allow for the pricing system to create better economic outcomes for all those participating in a truly free market.
Deregulation and greater participation may cause some added volatility and uncertainty. Indeed, within the free market system, there are those who win and those who lose. However, it is far better than the status quo unknowingly supported by an unholy alliance of leftists, hedge fund managers, and special interests. Empowering individuals to unilaterally change the rules of the market is anything but free, and it is certainly not fair. If you want to stop cronyism, start supporting capitalism.
