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February 14, 2021 02:14 am

The Rich Got Richer: GameStop's Trading Frenzy Benefited Wall Street's Elite

While GameStop's surge has been heralded as a victory for underdogs, "Growing evidence casts doubt on the idea that the episode mostly benefited small-time investors..." reports the Washington Post. (Alternate URLs here and here "And, in at least some cases, novice investors lost their shirts."Giant mutual funds that own the largest stakes in GameStop saw the biggest gains in value. Hedge funds — some that have started using algorithms to track retail investors on social media sites — appear to have bought and sold millions of shares during the stock's most volatile period of trading, industry experts said... Instead of heralding a new wave of investor populism, the rise and fall of GameStop's stock may end up reinforcing what professional investors have known for a long time: Wall Street is very good at making money, and more often than not, smaller investors lose out to wealthy traders and giant institutions. The four largest asset managers in the world together own 39 percent of GameStop shares, according to regulatory filings. Those stakes, which are mostly held for years in passive index funds, have collectively gained roughly $1 billion in value since the beginning of this year. One hedge fund, Senvest Management, recently boasted to clients that it made more than $700 million from a bet it placed on GameStop in September, the Wall Street Journal reported last week... The sheer number of shares that changed hands during the stock's most manic trading period in late January suggests the episode was driven by more than just small, retail investors. Some hedge funds bought shares because they were forced to "cover" their short positions — a financial cost imposed on investors who bet a stock will go down before it goes up. Meanwhile, other hedge fund managers were probably taking calculated, short-term risks buying and selling as the stock price traded up, said Robert J. Shapiro, a policy fellow at Georgetown University and former economic adviser to President Bill Clinton. "You have hundreds of millions of shares being traded at prices of $200 to $300 a share," Shapiro said. "The Reddit crew cannot afford to play in this game in any significant way...." Hedge funds have started to build algorithms or hire outside firms that specialize in scanning conversations on Reddit and Twitter for clues about what retail traders are thinking... "The most innovative investment firms realized that tracking Reddit was important to portfolio management," said Justin Zhen, co-founder of Thinknum Alternative Data, a New York software firm with more than 300 clients who pay for data scraped from various sources across the Web... industry experts say the soaring stock price was almost certainly given a boost by the hidden hand of larger investors... Another possibility regulators are examining is whether employees of large Wall Street firms were actively using the Reddit forum to boost their portfolios. The Post also got this pithy summation from Andrew Hong, an analyst for a financial software company in Toronto. "There are some really smart people on [WallStreetBets], but for the most part, all this is just poor habitual gambling addicts versus rich habitual gambling addicts."

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