After going through the market crash in February and March, then watching our government scramble to save the corporate credit market while everyday Americans were dying left and right, I became very skeptical of the legacy financial system. Chairman of the Federal Reserve Jerome Powell was announcing unlimited asset purchasing all while Treasury Secretary Steven Mnuchin lectured American families on CNBC how they could live on $1,200 a month. The unemployment rate skyrocketed to double digits, and billionaires added over a trillion dollars to their collective net worths. The legacy financial systems’ weaknesses were exposed during the pandemic, and people are starting to notice.
The exponential rise of the derivatives market has been on full display to start 2021.
GameStop went from $2.50 in 2020 to a high of $483 last week. This happened due to the subreddit r/WallStreetBets — where people make massive high risk and high reward bets — buying extreme amounts of GameStop, knowing the stock was heavily shorted by hedge funds. Being “short” means you borrow someone else’s shares for a premium hoping to give them back to that someone when the price is lower. A short squeeze happens when too many people are short and the price goes higher. This forces people who were short to buy back the shares they borrowed, making the price go higher and forcing more people to buy back the shares they borrowed in a seemingly never ending loop. This is exactly what happened in GameStop. On top of that, large amounts of option buying from people betting it was going to go up, left market makers — the dealers of these options — to buy significant amounts of the underlying stock, also known as a “gamma squeeze.” These market makers must buy the stock in order to stay neutral relative to all the options they sold. Market makers maintain a neutral position because they make money by providing liquidity to the market, not by taking directional bets.
This battle between Millennials/Gen Z-ers and Boomers represents much larger demographic forces.
As the pandemic hit we entered the “Fourth Turning,” a cyclical approach to demographics and history theorized by Neil Howe. The Fourth Turning is the last part of the 80-100 year demographic cycle that is characterized by massive change, creative destruction and redefining the national identity. This is brought on by social generations aging into their next period of life (Millennials joining the workforce, while Boomers leave the workforce). Unsurprisingly there has been widespread protest and unrest from the younger demographics as the labor force participation rate continues to drop, leaving more and more of these Millennials in poverty. This move in GameStop perfectly highlights the disconnect: a mob of young traders blowing up a Wall Street hedge fund (Melvin Capital), leaving them to be bailed out by Citadel. Wall Street pundits went on CNBC to say that this was “manipulation” and that these kids were breaking the law. In reality, large hedge funds have been using this strategy for decades. Not to mention, Citadel is actually the largest purchaser of RobinHood’s order flow (all of the transactions on RobinHood) to get access to their flows milliseconds before they actually execute, to front run retail momentum trades.
Never has Wall Street kicked a hornets’ nest of angry Millennials who feel disowned by the system with nothing to lose. All eyes are on Wall Street, and with a new Biden Administration touting its plan to close the wealth inequality gap, this could be one of the main battles that defines the uprising of the Millennials. It’s their moment in history, and the kids smell blood in the water.
Ronan Broadhead is a UO sophomore studying economics and political science from Seattle, Washington.