OPINION: Who Profits and Who Pays Under Robinhood’s Capitalism?
by Ethan Miller
A picture of Fearless Girl on Wall Street. Credit: Alex Proimos (Flickr)
In the flurry of analysis surrounding this week’s news about Reddit users and GameStop, many writers have portrayed the story as a two-sided battle. The lines have been drawn between hedge fund managers on one side, reviled by the left as corporate parasites and celebrated by the right, and r/WallStreetBets (r/WSB) Reddit power-users on the other, using the power of crowdsourcing to mobilize many thousands of small-dollar retail investors to pump up the price of GameStop’s stock approximately 1600 percent between January 12 and the markets closing on January 27.
Financial media outlets, led by CNBC and Fox Business, would have you believe that hedge fund managers are simple folks trying to make a living. Those same outlets decry the actions of r/WSB users as little more than market manipulation—which is never a problem on Wall Street. It’s easy to accept the framing of the former, reject the latter, and move on with our lives. By next Wednesday, there will probably be another major piece of news that shatters our assumptions about the political and economic system and raises our collective blood pressure.
Stuck in the middle of these two “sides” are a lot of regular people who, when the news about GameStop first hit the mainstream press earlier this week, may have decided to risk some of their hard-earned savings on this bet, boosted by the wild numbers being reported by some r/WSB die-hards. But by the time the mainstream media started reporting on the story, the stock had already hit record highs. The market phenomenon that drove prices sky-high (a “short squeeze”) required more and more investors to enter the market at higher and higher prices, leaving many retail investors holding the bag as prices started to slide and many brokerages temporarily restricted buying shares of GameStop, AMC and other stocks that had been targeted by r/WSB fans.
Bad stock tips used to be a dime a dozen. But today, new trading platforms like Robinhood have simplified opening a new account and starting to buy or sell shares or even small fractions of shares. Robinhood has also made it very easy for novice investors to trade complex financial instruments, normally the domain of traders at big Wall Street firms. This lead to the death by suicide of one 20-year old Robinhood user this past summer after the platform’s user interface led him to believe he was $730,000 in debt. Just last month, the SEC charged Robinhood with failing to properly communicate the firm’s stream of payments from trading firms—payments that put the platform’s profit motive ahead of its duty to seek reasonable trading terms for users. Robinhood agreed to pay $65 million dollars to settle the charge. In Massachusetts, where state securities laws are stronger than the federal standard, regulators have asserted that Robinhood exposes traders to “unnecessary trading risks” by “gamifying” investing.
Robinhood claims their mission is to democratize finance. But there’s an importance difference between sharing education and knowledge and simply engaging in savvy marketing to expand the base of retail investors, who are then encouraged to engage in risky high-frequency trading (enabled by Robinhood’s commission-free trading model). The result: Robinhood nets even more in the form of rebates and payments for routing orders through certain market-makers (including most notoriously, Citadel Securities). This practice, called payment for order flow, was at the root of the SEC’s recent charge.
It’s easy to sympathize with the redditors. If you don’t look too closely, the activity of the past few weeks resembles a classic story of everyday people coming together to take collective action to topple a corporate fat cat. While a handful of r/WSB users may have come out on top, the real winners in this case were the brokers, market-makers and the hedge funds that control them (including Citadel, which subsequently swooped in to “rescue” Melvin Capital). During periods of high market volatility like we saw this past week, Wall Street banks money no matter what. As anti-capitalists, we should not celebrate the use of speculative trading practices, regardless of whether the culprits are anonymous subreddit users or Goldman Sachs executives.
Everyone should be able to share in the wealth generated by our collective labor. In today’s economy, no one should be encouraged to engage in risky and complex financial transactions just to make ends meet. The wide distribution of investment risk disguised as “democratization” is actually part of a decades-long trend of gutting the social safety net and attacking defined-benefit pensions, forcing individuals to try to become experts in investing just to save up enough to comfortably retire. When people like Elon Musk celebrate the so-called “victory” of the internet over hedge fund managers, it is a sure sign that the so-called “bottom-up revolution” is nothing more than a crowdsourced recreation of exploitative financial models.
The labor movement has powerful tools to engage in the fight against hedge funds. Some unions, especially the American Federation of Teachers, are leading the way. Too often, pension plan trustees have invested plan assets into expensive and risky hedge funds that rarely pay out as intended. The funds themselves often act as a wealth transfer from the retirement funds of teachers, transit workers, and other public employees to fund managers, who rake in profits regardless of the fund’s investment return, contributing to the public pension funding crisis. Fortunately, unions often have a say in how pension plans are managed, and there’s an increasing awareness of the high-priced scam that hedge fund managers are pushing. At the rank-and-file level, members with pensions should push union leaders and pension trustees to disclose how funds are invested and to divest from these high-priced “alternative investments.”
For those who may have taken part in collective action for the first time this week and found that power exhilarating, the good news is that there are even more effective ways to build power and make changes in the way that our economy functions. From organizing a new union in your workplace to joining with your neighbors to confront corporate landlords and pushing elected leaders to pass a wealth and financial transaction tax (ironically known as the “robinhood tax”), Medicare for All and student debt cancellation, the possibilities of what a well-organized group of people can do is limitless. We should always be thinking about how to counter the toxic influence of hedge funds and other Wall Street profiteers, but we should be doing it on our terms, not theirs.
Ethan is a labor movement researcher, organizer, and communicator, and is the Secretary-Treasurer of the Nonprofit Professional Employees Union, IFPTE Local 70. He is also a CERTIFIED FINANCIAL PLANNER™ professional and works with individuals and couples to help plan for their sustainable financial futures at Planning for Progress. You can follow him on twitter at @ESMiller59.