Game’s up for stock market insiders

For the first time in my 50 years or so in and around financial markets, we’ve seen “outsiders” quite deliberately take on Wall St “insiders” – and even more, take them on at their own game.

The GameStop saga started out as just another insider excercise for making billions of dollars. Source: AFP

“Day traders shake Wall Street to its core” screamed one headline. “Global watchdogs sound alarm as shares frenzy grows” ominously warned another.

So, are the events of the week, across the other side of the Pacific and then all the way to the Big Apple, about to trigger another Global Financial Crisis?

Or at the very least, are they going to send Wall St – the very centre of the money universe – into a death spiral; will the “Wolves of Wall St” be evicted from their luxury penthouses and be back to selling pencils out of tin cups, 1930s style?

Well, in a word, no. A lot of easily excited journalists – more accurately, the sort of “journalists” we’ve seen proliferate and infest the entire mainstream media, most strikingly over there but also here – got somewhat more over-excited.

Yes, what’s been happening in and around GameStop – both on and even more ‘off’ Wall St – has been very interesting and quite significant; it’s also been what’ I’ve described as “delicious”.

Delicious, because for the first time in my 50 years or so in and around financial markets, we’ve seen “outsiders” quite deliberately take on Wall St “insiders” – and even more, take them on at their own game – and skin them.

It’s not just that the outsiders have made billions playing the Wall St game, it’s that they’ve taken the billions out of the pockets of insiders.

Year after year, decade after decade, insiders are more than happy to let outsiders make billions, provided they, the insiders, are making trillions.

Suddenly, they are the ones being forced to pay the tab, and boy are they unhappy at that – with reactions ranging from “it’s all a conspiracy which has to be crushed and profits confiscated (that’s to say, our money returned)” to “that’s what happens when you let outsiders into the room”.

These reactions are exactly like casinos banning so-called “card-counters” who play games like Blackjack perfectly legally, but play the cards and the odds to reverse the game percentage from the 101-102 per cent that wins for the house to less than 100 per cent that wins for the player.

In both casinos – the honest, open ones, and the second sort like the New York Stock Exchange and our ASX – if the already rigged system doesn’t guarantee the insiders keep winning, well then, the system had to be rigged some more. And those non-invited winners banned.

The GameStop saga started out as just another everyday insider exercise in making billions.

So-called hedge funds – activist insider investors – targeted GameStop shares as over-valued and embarked on massive short-selling. We’ve seen exactly the same happen here.

They sell shares they don’t own, by borrowing shares from existing GameStop holders, with the intention of buying them back (and returning them to those holders) at a lower price.

Why existing holders in a company are prepared to lend their shares to someone seeking to drive down the price and so directly cost them money is a separate, and complicated, story for another day. Just accept that they do.

Swell, that’s what they are supposed to do; to borrow the shares for what’s called “covered short-selling”.

There’s also “naked short-selling” when you haven’t borrowed and you are quite literally selling shares that you don’t own, hoping to be able to buy them back within a day or so before you have to actually “deliver them” to the buyer.

Naked short-selling is illegal both there and here and shouldn’t be happening, but it appears it was in the GameStop case and it just made the trap that was sprung on the insiders that much more potent. And yet more, well, delicious.

GameStop was exactly the wrong sort of company for shorters to target – a lot like a bunch of thugs deciding to beat-up some people in a park only to discover they were a group of black-belt Kung Fu-ers.

There’s a literal army of GameStop enthusiasts out there; all tech-savvy and wired 24/7. Using a Reddit chat room they embarked on an instantaneous and massive counter-buying ‘game’.

Their buying overwhelmed the hedge-fund selling and sent the GameStop price soaring. The hedge funds lost billions.

Moan, moan; it’s not supposed to be like this. We engage in a short-raid; the price gets driven down by our selling; we start to buy back; we make maybe a billion or two, moderated by our buying taking the share price up a bit.

And life goes profitably on. Apart from the poor schmucks out there in ‘outsider land’ who’ve actually paid for that billion or two, either by buying at the initial higher price or selling into the lower price buy-back.

Two bottom lines.

So, yes, the bell has been rung on the games the insiders play at the outsiders expense. Wall St can’t be quite the same again.

But no, it’s still marginal and it ain’t another GFC.

Originally published as Game’s up for stock market insiders