47BloombergBusinessweek February 8, 2021
learningthemechanicsandstillcomeawaywithouta satisfying
answertothequestion:Howdoyouputa valueonthisthing?
Andwhataretheforcesdrivingdemandinthecryptocurrency
markets—awebofregulatedexchanges,offshoretradingplat-
forms,andsomeverymurkycompanies?Howmucharethe
upsanddownsofBitcointheresultofmanipulationbythebig
“whale”investorswhocontrolthevastmajorityofthetokens?
Inanycase,WallStreetisalready wellembeddedin
crypto.Thereareinvestmenttrustsofferingexposuretoit,
fora nicefee,andvariousmoneymanagershavetried—so
farwithoutsuccess—togetregulatorstoblessa BitcoinETF.
Thatfigures,sincetherearealreadyETFsforSPACs,andthere
arebrokerssellingclientsleveragedbetslinkedtotheper-
formanceofhotETFs.It’sboxesinsideofboxesinwrappers
thatmakethepricetagshardtoread.
Robinhoodis a differentkindofmiddleman.Unlikea lotof
WallStreet,Robinhooddoesn’tmakeitsmoneybystanding
betweenyouandthemarketandtakinga feeoffthetop.But
it’sstillanintermediary—inthiscase,a psychologicalinter-
mediary. It’s standing between you and the market with fun
software. A Robinhood spokeswoman says they designed
their app to make investing “more familiar and less daunt-
ing” to encourage people to “take control of their finances.”
Startup discount brokerages are similar to media companies
now. Like Twitter and YouTube, they need to grab your atten-
tion and drive engagement. But their goal isn’t to push ads to
you, it’s to get you to trade. Even though they charge you no
commission, they do get paid for it.
How? As Annie Massa and Sarah Ponczek recently
explained in a Bloomberg Businessweek cover story, Robinhood
earns most of its revenue from a common industry practice
called payment for order flow. That is, when you buy or sell
a stock or an option, they send the order to be executed by
an outside trading firm that pays Robinhood. These compa-
nies pay because they can earn small profits on the “spreads”
between what buyers are willing to pay and what sellers are
willing to take for a security. (Robinhood, like all brokers, is
required to seek the best possible trade execution for its cus-
tomers, and it spreads trades among firms.) These little gains
add up when trades are done in the millions, and the more
trading there is, the better it is for these market makers. They
don’t really care if it’s up or down.
So the fight over GameStop was partly just a fight between
different parts of the Wall Street establishment. Shorts got
squeezed, but some giant high-speed trading firms behind
the scenes no doubt did quite well as a result of all the retail
trading and volatility. “It’s not David vs. Goliath,” wrote Alexis
Goldstein in her Markets Weekly newsletter. “It’s Goliath vs.
Goliath, with David as a fig leaf.”
And all along, professionals long and short have been fol-
lowing the signals from retail traders and trying to get ahead
of—or stoke—the momentum. Senator Elizabeth Warren,
a Democrat from Massachusetts, said on CNN that it’s still
unclear what was really moving GameStop’s stock and that
there was likely “big money on both sides.” She called for
theU.S.SecuritiesandExchangeCommissiontoinvestigate
possible stock manipulation.
All of this frenetic investment activity might be a cause
for optimism if it seemed connected to a healthier economy.
But the stock market and asset prices have been inflating and
enriching the world’s wealthiest even as most people have
faced greater job instability and slow wage growth. So far the
sudden enthusiasm for GameStop’s stock hasn’t done much
for the company itself, much less for the employees behind
the counters. To the traders go the tendies.
A higher share price could be an opportunity to sell more
stock and get some cash to reinvest in the company’s busi-
ness. Some other popular meme stocks, such as American
Airlines Group Inc. and AMC Entertainment Holdings Inc.,
have recently taken steps to sell new shares, Bloomberg has
reported, in what are known as at-the-market programs.
GameStop may yet try something like that, but it could be
tricky to step into a market where shares are $65 one day,
$347 a few days later, and $90 a few days after that.
As Henwood, the writer in Jacobin, has pointed out, sur-
prisingly little of what happens in the stock market is about
raising money for companies to make real-world productive
investments. Prior to the pandemic, corporations seemed
short of ideas for what to do with their cash and often forked
it over to their shareholders (and their stock-option-paid exec-
utives) by buying back their own stock. Perhaps they’ve been
looking at financially strained U.S. households and concluded
there’s not enough demand to spark growth.
One telling moment in the Battle of GameStop was deliv-
ered by veteran hedge fund manager Leon Cooperman in an
interview on CNBC. “The reason the market is doing what
it’s doing,” he said, “is people are sitting at home getting
their checks from the government, basically trading for no
commissions and no interest rates.” Lots of people on Wall
Street believe the retail trading boom has been fueled by pan-
demic stimulus and enhanced unemployment checks drop-
ping into Robinhood accounts. Some of that’s happened, no
question—there’s plenty of talk on WSB about how to spend
the “stimmy.” But more of the money has gone into buying
groceries, covering the rent, and paying down debt.
There’s been a lot of cheap money floating around in the
past decade, thanks to low interest rates and Federal Reserve
policy. Much of that has gone into financial assets, jacking
up the wealth of those who own them. Cooperman, to be
fair, sees the problem there: “Eighty percent of the stock is
owned by 20% of the people,” he said. (The reality is actu-
ally more extreme than that, with the richest 10% holding
84% of equity wealth, according to economist Edward Wolff.)
No, you can’t day-trade away economic inequality. But one
of many changes wrought by the pandemic is that it’s shown
how aggressive government spending to put cash in ordinary
Americans’ pockets can do a lot of good. What if there was
an economy where households relied less on wealth trickling
down from asset owners? That would be something for Wall
Street to be nervous about. <BW>