By Nina Larbi ’22
Op-Ed Editor
2021 is shaping up to be an eventful year, but one unexpected development was the GameStop short squeeze. After finding out that gaming retailer GameStop had the most shorted — or bet against — stock on the market, a group of Reddit users organized themselves and individually bought GameStop stock en masse. They drove up the cost of stock, forcing hedge funds that had bet GameStop stock would decrease in value and had hence borrowed stock to sell at a low price. This practice is known as “short selling” — buying borrowed stock back at a much higher value than anticipated, which created the “squeeze.”
Some media outlets have painted the GameStock short squeeze as a populist uprising, “a David and Goliath story,” according to CNN, or usurpation of power from the financial sector via a group of frenzied gamblers seeking to play a prank on those who have earned the right to make a profit from the stock market. But a lot of people, including myself, had questions: What is short selling? What do hedge funds do? How were the Reddit users able to organize? Exchanges over social media explained short selling using bike metaphors, and news outlets backtracked, publishing articles with basic information on the stock market. From the financiers’ outcry to the confusion of the average citizen, the GameStock saga has made it clear that financial literacy is a necessary skill that many Americans, including myself, lack.
The GameStop short squeeze was initiated by Keith Gill, a former financial educator for an insurance firm, who posted on Reddit in mid-2019 detailing his $53,000 investment in GameStop. Since GameStop was considered struggling for years, his choice was originally criticized.
Gill widely publicized and made content regarding his investment in GameStop. Others began to follow him in the r/WallStreetBets subreddit and were able to execute the short squeeze by buying up stock themselves. Trading was available to them via platforms like Robinhood that allow users to easily trade from their phones without paying an initial fee. Thus, the average day trader was able to play on the same level as hedge fund managers. The short squeeze they executed dealt a blow to hedge fund managers, who were already doing something dubiously legal, which is naked short selling, or short selling more stocks than GameStop had available, and made their bets fail miserably.
Now, hedge fund managers are crying out over social media and news segments that they were taken out by a bunch of nothing-to-lose-type gamblers who know nothing about the stock market and thus have no legitimacy to participate. On CNBC, CEO of Omega Advisors Leon Cooperman expressed that traders, who “don’t have any idea what they’re doing,” are inappropriately attacking the wealthy.
The job of a hedge fund manager is to gamble. Neither a degree nor money can change that. Cooperman’s assertions reflect that he and others like him feel intruded upon, that participation in and knowledge of the financial sector is only privy to them and that the average investor has no business in “their” territory.
Many are still anxious about the major financial decisions they will have to make regarding credit and debt, buying a house and even investing for retirement. Additionally, there is lingering resentment from the 2008 crisis toward the financial sector, so people avoid it. We understand that what happens on Wall Street affects our livelihoods and security because of how banks and investors sought to make money from mortgages in risky, predatory ways prior to the 2008 crash. But most of us lack the right education to make beneficial financial decisions and understand how we can be informed participants in the financial sector, which works to our disadvantage. Credit card companies will camp out on college campuses and bait freshmen with free T-shirts and pens; banks will give out high-interest subprime loans to Black and Latinx people disproportionately, and so forth. Clearly the financial sector is in the wrong in both situations, but because the government is unwilling to meaningfully regulate them, we must become more financially literate.
Financial illiteracy is an enduring problem worldwide. In 2006 the Organisation for Economic Co-operation and Development found that only 28 percent of respondents in Australia had a decent understanding of compound interest and that most British respondents acquired financial information by chance. However, they also found that, on average, American workers increased their participation in 401(k) plans when their employers offered financial education programs. Education can come in many forms, including workplace seminars, brochures given out on college campuses and even a television drama. In Mongolia, a series made to increase financial literacy called “The Course to Become a Millionaire” fomented a 14 percent increase in financial options expansion.
The GameStop short squeeze, executed by a group of day traders, illustrates that average people can impact the stock market greatly and that, with the right financial education, it won’t always be the investors and banks taking advantage of people who don’t know any better. As parasitic as the financial sector is and as deferential as the government is toward it, financial literacy is essential for people to make more informed decisions and resist exploitation.