As explained by Dean Baker, senior economist at the Center for Economic Policy and Research earlier this week, “A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.”
Interestingly, Robinhood’s largest customer, which profits from being the middleman for the app users’ ‘no fee’ trades, is Citadel Securities,a subsidiary of which also bailed out Melvin Capital when it was teetering on the brink of collapse. Somewhat ironically, Melvin may have been targeted because it’s more transparent than other funds about its shorts.
For progressives following the story, one of the main takeaways was that it exposed the lie at the heart of the so-called ‘democratization’ touted by Robin Hood and other day trading apps who came to the rescue of Melvin and Citron.
While it’s true that the day trading edge lords driving Wallstreetbets aren’t what the left might have liked them to be, they performed another public service in bringing to light the fact that big players like Citadel Securities can basically regulate markets themselves to protect their perceived interests and government agencies like the SEC in the U.S. that are supposed to be tasked with this will just go along with it.
Jesus: Hey, Dad? God: Yes, Son? Jesus: Western civilization followed me home. Can I keep it? God: Certainly not! And put it down this minute--you don't know where it's been! Tom Robbins in Another Roadside Attraction