In the unlikely case that any of us were in any naïve doubt, the maiden month of the new year assured us that 2021 had no intentions of being any more ‘precedented’ than its tumultuous predecessor. After a month which encompassed a populist assault on a government, the impeachment of an outgoing president (perhaps more precedented than other items on this list), and the inauguration of his successor, the final week of January moved refreshingly away from the world of US politics into the world of economics – with the GameStop frenzy making major waves in the fast-paced, risk-taking world of the stock exchange. Following Reddit’s short-lived triumph against short sellers, and Wall Street’s underhand counterattack, the question remains: will such a phenomenal event change the nature of short selling and retail trading for good? Or will Wall Street hypocritically back regulation to prevent so hard-hitting a short squeeze from ever being imitated?

This week the House Financial Services committee, chaired by Rep. Maxine Walters, held hearings regarding the developments surrounding GameStop and other shares in recent weeks. Rep. Walters called the hearing in the very initial days of the short squeeze following a similar announcement by Sen. Sherrod Brown, incoming chairman of the Senate Banking Committee, who said, “People on Wall Street only care about the rules when they’re the ones getting hurt.” This echoed the general online reaction to Robinhood’s questionable freezing of $GME purchases through its app. The hearings, which took place virtually, touted an amusing odd-one-out line-up which includes four CEOs (those of Robinhood, Reddit, Citadel, and Melvin Capital), and leading Reddit investor Keith Gill, better known on the internet as ‘Roaring Kitty’, who testified before the House about the stock market developments of recent weeks.

We have all by now heard the story a hundred times over: amateur traders, spotting leading hedge funds’ bets against the value of GameStop, used retail investing apps, primarily ‘Robinhood’, to purchase shares in the company en masse, triggering a deliberate upsurge in share prices to over 1800% its prior rate. This wreaked havoc on Wall Street; hedge funds such as Citadel and Melvin capital, who had confidently short sold GameStop shares at relatively favourable rates, found themselves scrambling to claw back the stock at any loss necessary. This particularly amusing detail is owed to the very essence of short selling; the shorted stock is not the seller’s own to begin with, it is merely ‘borrowed’ with the guarantee of its safe return to the owner, hopefully at a reasonable profit for the investor by buying back at a lower price, though sometimes at an acceptable loss; minor blows in the big picture of a hedge fund. The problem this time, for short sellers at least, was that when nobody sells, prices soar, and losses become incalculable.

The initial stages of the short squeeze saw some heart-warming success stories, with individuals raising funds needed for medical treatment, student debt, and life-saving surgery for one man’s dog. The reaction among the majority of the internet was one of jubilated schadenfreude. However, as prices soared, Wall Street caught on to the game and moved quickly to shut down the Redditors’ ruse. Robinhood froze the purchasing of GameStop and other popular ‘meme’ shares through its app, allowing users only to sell their assets. The question quickly arose, if purchases are frozen, to whom can the shares be sold? The answer: the short sellers. The ironically named Robinhood soon showed its true colours as a fair-weather friend of the lay investor, with no agenda to ‘steal’ from the rich to give to the poor. The resulting panic of this cunning move was enough to break the solidarity of stockholders, with many folding and getting out of the game as quickly as possible. Others who stuck to their guns, found themselves holding large amounts of shares valued at its normal price, some facing up to an 80% loss. Wall Street played dirty, and they won.

While few are blind to the corruption of Wall Street, Robinhood’s brazen freezing of purchasing $GME through its app caused justified backlash. Sen. Brown’s remarks not only accurately summed up the GameStop standoff, but in fact Wall Street’s track record for decades. For years, Wall Street’s biggest players and top hedge funds have infamously opposed regulation of the stock market and lobbied for repeal of regulatory acts. One such example is the Dodd-Frank Act, put in place after the 2008 financial crisis – a crisis which arose in no small part due to Wall Street’s own unregulated recklessness. Wall Street have always extolled the virtues of a free market, independent from government regulation or intervention, and lobbied Donald Trump to repeal Dodd-Frank in order to return to the kind of irresponsible trading which lined their pockets while outsourcing the risk to the public sector through guaranteed bailouts in the case of inevitable failure. However, despite this anti-regulation, free trading rhetoric, the rules seem to only apply to everyone else; when the philosophy of a free market puts hedge funds at risk, intervention is immediate and market freedom is a forgotten priority. And while the Chairs of Congress’ respective Financial committees condemned Wall Street’s actions, any optimism for the financial giants facing repercussions may be premature.

Mark Zuckerberg’s internet-breaking hearing in 2018 stuck in the mind in anticipation of the week’s proceedings. In the wake of the Cambridge Analytica data scandal, Zuckerberg testified before Congress regarding Facebook’s role in the mishandling of the personal data of millions of its users. However, while the hearing was supposed to be an interrogation on the use and abuse of personal data by social media giants, many of the Senators and Representatives given the opportunity to cross-examine Zuckerberg seemed to have very little understanding of how the platform operated in the first place. This resulted in a relatively easy time for Zuckerberg, effectively giving him a couple days’ break from the backbreaking work of CEO to field tech support questions from older (and younger) members of the government of the United States, patiently explaining browser cookies and end-to-end encryption, among other easily-Googled inquiries; ultimately failing to highlight the gravity of unethical data practices. The 60-year-old average age of Congress in 2020 did not bode well for a much more successful cross-examination of Silicon Valley elite, Vlad Tenev, CEO of Robinhood. While the more tuned-in Representatives were rhetorically critical of Robinhood and Wall Street short sellers, the hearing was ultimately a political theater which will unlikely do much to curb Wall Street corruption. Just as Zuckerberg got away with little more than a slap on the wrist, the week’s hearings are likely to generate better headlines than they do legislation.

Finally, regardless of what regulatory measures may follow GameStop-gate, it remains to be seen whether Reddit’s coordinated assault on short sellers will set a new precedent and change the culture of retail investment. Retail (amatuer) trading reportedly doubled in 2020, with a new class of smartphone-wielding millennial investors taking hold of over 30% of the market during the year. Traditionally minor players in the grand scheme of the stock exchange, mostly individuals looking to make small returns from modest investments (as much for the satisfaction of placing a good bet as anything), amateur traders demonstrated their strength as a unit when they sent GameStop stocks skyrocketing simply through the coordinated use of a free-to-use investment app. While Wall Street did not take kindly to the mass short squeeze, the Reddit cohort in no way acted illegally, or even dishonestly; they played more within the spirit of the rules than hedge funds themselves often do, and made a major impact doing so. 

In a world in which Wall Street’s big players accepted the consequences of a bad bet, one could see it becoming a constant feature of the short selling game. However, while it seems that US Congress are currently critical of Robinhood’s actions, should the week’s hearings pass without consequence, Wall Street will likely waste little time throwing their weight behind lobbying for regulation of retail investment in the following months, preventing replication of the GameStop short squeeze and protecting the reckless interests of billionaire hedge funds. Though it ordinarily backs opposition and repeal of market regulation, there is no doubt that Wall Street will just as readily support reform which will quietly suffocate the social-media-savvy retail investor, removing any challenge to the throne of the hedge fund as corrupt king of the stock market.