Let Funny Money Games Stop

Partha Chakraborty-
Partha Chakraborty

Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.

Before he started it all, “Roaring Kitty” Keith Gill was a marketing busybody with Mass. Mutual Life Insurance in Boston. But, to his adoring followers as well as his detractors Gill (“DeepF—ingValue”) is the primary force behind the beyond-meteoric rise of GameStop (NYSE: GME) last few months, up 1600% this year alone through today. His daily screenshot of gains (and losses) became a rallying cry for hordes on Reddit WallStreetBets. “Your steady hand convinced many of us to not only buy, but hold. Your example has literally changed the lives of thousands of ordinary normal people. Seriously thank you. You deserve every penny,” read a post recently, there are hundreds more. “I didn’t expect this,” Gill told The Wall Street Journal, “This story is so much bigger than me…I support these retail investors, their ability to make a statement.”

The story is indeed much bigger than Keith Gill and his USD 33 MM E*Trade account, padded mostly by his call on GME. It is about funny money games so-called sophisticated investors play on the market. It is also about how the same irreverence becomes poison when hoi-polloi dip their toes in the same pond.

First the story. A bunch of youngsters with spare cash, more than enough time, and a keen desire to “stick it to the man” identified a heavily shorted stock, GameStop, created a community with a distinct lingo (“diamond hand”, “going to the moon and the Mars”) on Reddit where they trade info on their own gain (and loss) from purchasing and holding it. The rest is history. Nobody claims these youngsters did any “research” on the company, even they do not claim GME is “worth” what they paid. Their Reddit threads are filled with glee that they taught the professionals a ‘lesson’, the same professional class that connives to shut them out of opportunities and dignity. Class warfare, meet free trading!

Assuming these trades were done of their free will in a permissioned fashion, does it even matter if they did any research about the valuation of GME?

One of the first lessons of free-market economics is that any object is worth as much as somebody is willing to pay for it. There are models of human behavior and price movement that may give us direction, at times the precise value, and they can take into account all sorts of macro implications and/or individual incentives at a micro-level. Any participant of the investment world will aver that each is just a model, the ultimate test is if prices are observed in trades that actually close. This simple axiom is true for pricing any kind of financial instruments – single securities or a basket of them, derivatives – or bets on GameStop. Like any intellectual pursuit, financial theorists go back to the drawing board when existing models fail to explain a long-standing anomaly. Frequently that meant combining behavioral attributes to the dogma of rational human being.

It is quite plausible that these ‘Reddit Rowdies’ are perfectly rational given their expressed emotional attachment, even if that means separation from reality. That separation, however, is nothing new. Most recently, the Fed created a ‘wall of liquidity’ to prevent financial Armageddon in pandemic times, thereby spawning asset inflation not supported by economic underpinnings. Equity markets reached all-time highs in 2020 even when the US economy lost 3.5% year over year, the most drop since World War II.  The biggest beneficiaries of Fed’s largesse are hedge funds, especially larger ones. Some of them are caught on the wrong side in the GameStop drama, but do we need to shed a tear? Why?

Some raised concerns about the fundamental impact on US economy, we have even seen ominous predictions of a “Lehman moment”. Poppycok!! Even if they manage to force a short squeeze for each of the top 10 most shorted stocks, combined losses will be in tens of billions, a chump change for the financial system. And these losses will be borne by accredited investors, including institutions, who are sitting on trillions of dollars of paper gains from 2020. Why are we even talking about their loss?

No matter the economic or market realities, High-Speed Traders (“HFT”) have been the biggest winners for a really long time. They vary widely in their computational approach and bandwidth, but the one thing that binds them is this –the only thing that matters is that you need to close your position with a profit. In other words, there is no underlying valuation of anything. With trillions of dollars of exposure, they are a real threat to the financial system as they cancel out the very idea of economic value in building up the casino.

Not even Reddit rowdies claim they are investors. They are amateur players who are risking nobody else but themselves with their silly acts. Suddenly they are being held up as bad guys because they are iconoclasts when it comes to valuation. HFT operators are no different, why not them? It is suspicious when we single out Reddit broncos for chastisement, but laud hedge fund managers, HFT players included, on their success.

Evil genius as they are, HFT operators are structured to benefit from both sides of a trade. To deny them the power, you first need to take away the silver spoon that feeds the beast. A small tax on each trade will not hurt fundamental traders because they bet on a risk factor or a value driver to turn their way. Such moves happen only over time; consequently, fundamental traders churn their holdings a lot less. This small tax, however, can negate the viability of most trades for HFT, thereby reducing a chasm between value and price they so profitably exploit but ridicule.

Funny money games stop only when you withdraw all major players. Reddit rowdies prowling GameStop are too insignificant to warrant a second look. Closer scrutiny must, instead, be paid to whales who have been playing the same game for years with impunity.


[Statutory Warning: Nothing in this article should be taken as investment advice for or against any specific security. I purchased 3 units of GameStop Corp. equity as a proof of stake while writing this article.]