Saturday 30 January 2021
The GameStop affair is like tulip mania on steroids
It’s eerily similar to the 17th-century Dutch bubble, but with the self-organising potential of the internet added to the mix writes Dan Davies in The Guardian
Towards the end of 1636, there was an outbreak of bubonic plague in the Netherlands. The concept of a lockdown was not really established at the time, but merchant trade slowed to a trickle. Idle young men in the town of Haarlem gathered in taverns, and looked for amusement in one of the few commodities still trading – contracts for the delivery of flower bulbs the following spring. What ensued is often regarded as the first financial bubble in recorded history – the “tulip mania”.
Nearly 400 years later, something similar has happened in the US stock market. This week, the share price of a company called GameStop – an unexceptional retailer that appears to have been surprised and confused by the whole episode – became the battleground between some of the biggest names in finance and a few hundred bored (mostly) bros exchanging messages on the WallStreetBets forum, part of the sprawling discussion site Reddit.
The rubble is still bouncing in this particular episode, but the broad shape of what’s happened is not unfamiliar. Reasoning that a business model based on selling video game DVDs through shopping malls might not have very bright prospects, several of New York’s finest hedge funds bet against GameStop’s share price. The Reddit crowd appears to have decided that this was unfair and that they should fight back on behalf of gamers. They took the opposite side of the trade and pushed the price up, using derivatives and brokerage credit in surprisingly sophisticated ways to maximise their firepower.
To everyone’s surprise, the crowd won; the hedge funds’ risk management processes kicked in, and they were forced to buy back their negative positions, pushing the price even higher. But the stock exchanges have always frowned on this sort of concerted action, and on the use of leverage to manipulate the market. The sheer volume of orders had also grown well beyond the capacity of the small, fee-free brokerages favoured by the WallStreetBets crowd. Credit lines were pulled, accounts were frozen and the retail crowd were forced to sell; yesterday the price gave back a large proportion of its gains.
To people who know a lot about stock exchange regulation and securities settlement, this outcome was quite inevitable – it’s part of the reason why things like this don’t happen every day. To a lot of American Redditors, though, it was a surprising introduction to the complexity of financial markets, taking place in circumstances almost perfectly designed to convince them that the system is rigged for the benefit of big money.
Corners, bear raids and squeezes, in the industry jargon, have been around for as long as stock markets – in fact, as British hedge fund legend Paul Marshall points out in his book Ten and a Half Lessons From Experience something very similar happened last year at the start of the coronavirus lockdown, centred on a suddenly unemployed sports bookmaker called Dave Portnoy. But the GameStop affair exhibits some surprising new features.
Most importantly, it was a largely self-organising phenomenon. For most of stock market history, orchestrating a pool of people to manipulate markets has been something only the most skilful could achieve. Some of the finest buildings in New York were erected on the proceeds of this rare talent, before it was made illegal. The idea that such a pool could coalesce so quickly and without any obvious sign of a single controlling mind is brand new and ought to worry us a bit.
And although some of the claims made by contributors to WallStreetBets that they represent the masses aren’t very convincing – although small by hedge fund standards, many of them appear to have five-figure sums to invest – it’s unfamiliar to say the least to see a pool motivated by rage or other emotions as opposed to the straightforward desire to make money. Just as air traffic regulation is based on the assumption that the planes are trying not to crash into one another, financial regulation is based on the assumption that people are trying to make money for themselves, not to destroy it for other people.
When I think about market regulation, I’m always reminded of a saying of Édouard Herriot, the former mayor of Lyon. He said that local government was like an andouillette sausage; it had to stink a little bit of shit, but not too much. Financial markets aren’t video games, they aren’t democratic and small investors aren’t the backbone of capitalism. They’re nasty places with extremely complicated rules, which only work to the extent that the people involved in them trust one another. Speculation is genuinely necessary on a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it’s a necessary evil, and it needs to be limited. It’s a shame that the Redditors found this out the hard way.
Towards the end of 1636, there was an outbreak of bubonic plague in the Netherlands. The concept of a lockdown was not really established at the time, but merchant trade slowed to a trickle. Idle young men in the town of Haarlem gathered in taverns, and looked for amusement in one of the few commodities still trading – contracts for the delivery of flower bulbs the following spring. What ensued is often regarded as the first financial bubble in recorded history – the “tulip mania”.
Nearly 400 years later, something similar has happened in the US stock market. This week, the share price of a company called GameStop – an unexceptional retailer that appears to have been surprised and confused by the whole episode – became the battleground between some of the biggest names in finance and a few hundred bored (mostly) bros exchanging messages on the WallStreetBets forum, part of the sprawling discussion site Reddit.
The rubble is still bouncing in this particular episode, but the broad shape of what’s happened is not unfamiliar. Reasoning that a business model based on selling video game DVDs through shopping malls might not have very bright prospects, several of New York’s finest hedge funds bet against GameStop’s share price. The Reddit crowd appears to have decided that this was unfair and that they should fight back on behalf of gamers. They took the opposite side of the trade and pushed the price up, using derivatives and brokerage credit in surprisingly sophisticated ways to maximise their firepower.
To everyone’s surprise, the crowd won; the hedge funds’ risk management processes kicked in, and they were forced to buy back their negative positions, pushing the price even higher. But the stock exchanges have always frowned on this sort of concerted action, and on the use of leverage to manipulate the market. The sheer volume of orders had also grown well beyond the capacity of the small, fee-free brokerages favoured by the WallStreetBets crowd. Credit lines were pulled, accounts were frozen and the retail crowd were forced to sell; yesterday the price gave back a large proportion of its gains.
To people who know a lot about stock exchange regulation and securities settlement, this outcome was quite inevitable – it’s part of the reason why things like this don’t happen every day. To a lot of American Redditors, though, it was a surprising introduction to the complexity of financial markets, taking place in circumstances almost perfectly designed to convince them that the system is rigged for the benefit of big money.
Corners, bear raids and squeezes, in the industry jargon, have been around for as long as stock markets – in fact, as British hedge fund legend Paul Marshall points out in his book Ten and a Half Lessons From Experience something very similar happened last year at the start of the coronavirus lockdown, centred on a suddenly unemployed sports bookmaker called Dave Portnoy. But the GameStop affair exhibits some surprising new features.
Most importantly, it was a largely self-organising phenomenon. For most of stock market history, orchestrating a pool of people to manipulate markets has been something only the most skilful could achieve. Some of the finest buildings in New York were erected on the proceeds of this rare talent, before it was made illegal. The idea that such a pool could coalesce so quickly and without any obvious sign of a single controlling mind is brand new and ought to worry us a bit.
And although some of the claims made by contributors to WallStreetBets that they represent the masses aren’t very convincing – although small by hedge fund standards, many of them appear to have five-figure sums to invest – it’s unfamiliar to say the least to see a pool motivated by rage or other emotions as opposed to the straightforward desire to make money. Just as air traffic regulation is based on the assumption that the planes are trying not to crash into one another, financial regulation is based on the assumption that people are trying to make money for themselves, not to destroy it for other people.
When I think about market regulation, I’m always reminded of a saying of Édouard Herriot, the former mayor of Lyon. He said that local government was like an andouillette sausage; it had to stink a little bit of shit, but not too much. Financial markets aren’t video games, they aren’t democratic and small investors aren’t the backbone of capitalism. They’re nasty places with extremely complicated rules, which only work to the extent that the people involved in them trust one another. Speculation is genuinely necessary on a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it’s a necessary evil, and it needs to be limited. It’s a shame that the Redditors found this out the hard way.
Friday 29 January 2021
Thursday 28 January 2021
Wednesday 27 January 2021
Covid lies cost lives – we have a duty to clamp down on them
George Monbiot in The Guardian
Why do we value lies more than lives? We know that certain falsehoods kill people. Some of those who believe such claims as “coronavirus doesn’t exist”, “it’s not the virus that makes people ill but 5G”, or “vaccines are used to inject us with microchips” fail to take precautions or refuse to be vaccinated, then contract and spread the virus. Yet we allow these lies to proliferate.
We have a right to speak freely. We also have a right to life. When malicious disinformation – claims that are known to be both false and dangerous – can spread without restraint, these two values collide head-on. One of them must give way, and the one we have chosen to sacrifice is human life. We treat free speech as sacred, but life as negotiable. When governments fail to ban outright lies that endanger people’s lives, I believe they make the wrong choice.
Any control by governments of what we may say is dangerous, especially when the government, like ours, has authoritarian tendencies. But the absence of control is also dangerous. In theory, we recognise that there are necessary limits to free speech: almost everyone agrees that we should not be free to shout “fire!” in a crowded theatre, because people are likely to be trampled to death. Well, people are being trampled to death by these lies. Surely the line has been crossed?
Those who demand absolute freedom of speech often talk about “the marketplace of ideas”. But in a marketplace, you are forbidden to make false claims about your product. You cannot pass one thing off as another. You cannot sell shares on a false prospectus. You are legally prohibited from making money by lying to your customers. In other words, in the marketplace there are limits to free speech. So where, in the marketplace of ideas, are the trading standards? Who regulates the weights and measures? Who checks the prospectus? We protect money from lies more carefully than we protect human life.
I believe that spreading only the most dangerous falsehoods, like those mentioned in the first paragraph, should be prohibited. A possible template is the Cancer Act, which bans people from advertising cures or treatments for cancer. A ban on the worst Covid lies should be time-limited, running for perhaps six months. I would like to see an expert committee, similar to the Scientific Advisory Group for Emergencies (Sage), identifying claims that present a genuine danger to life and proposing their temporary prohibition to parliament.
While this measure would apply only to the most extreme cases, we should be far more alert to the dangers of misinformation in general. Even though it states that the pundits it names are not deliberately spreading false information, the new Anti-Virus site www.covidfaq.co might help to tip the balance against people such as Allison Pearson, Peter Hitchens and Sunetra Gupta, who have made such public headway with their misleading claims about the pandemic.
But how did these claims become so prominent? They achieved traction only because they were given a massive platform in the media, particularly in the Telegraph, the Mail and – above all – the house journal of unscientific gibberish, the Spectator. Their most influential outlet is the BBC. The BBC has an unerring instinct for misjudging where debate about a matter of science lies. It thrills to the sound of noisy, ill-informed contrarians. As the conservationist Stephen Barlow argues, science denial is destroying our societies and the survival of life on Earth. Yet it is treated by the media as a form of entertainment. The bigger the idiot, the greater the airtime.
Interestingly, all but one of the journalists mentioned on the Anti-Virus site also have a long track record of downplaying and, in some cases, denying, climate breakdown. Peter Hitchens, for example, has dismissed not only human-made global heating, but the greenhouse effect itself. Today, climate denial has mostly dissipated in this country, perhaps because the BBC has at last stopped treating climate change as a matter of controversy, and Channel 4 no longer makes films claiming that climate science is a scam. The broadcasters kept this disinformation alive, just as the BBC, still providing a platform for misleading claims this month, sustains falsehoods about the pandemic.
Ironies abound, however. One of the founders of the admirable Anti-Virus site is Sam Bowman, a senior fellow at the Adam Smith Institute (ASI). This is an opaquely funded lobby group with a long history of misleading claims about science that often seem to align with its ideology or the interests of its funders. For example, it has downplayed the dangers of tobacco smoke, and argued against smoking bans in pubs and plain packaging for cigarettes. In 2013, the Observer revealed that it had been taking money from tobacco companies. Bowman himself, echoing arguments made by the tobacco industry, has called for the “lifting [of] all EU-wide regulations on cigarette packaging” on the grounds of “civil liberties”. He has also railed against government funding for public health messages about the dangers of smoking.
Some of the ASI’s past claims about climate science – such as statements that the planet is “failing to warm” and that climate science is becoming “completely and utterly discredited” – are as idiotic as the claims about the pandemic that Bowman rightly exposes. The ASI’s Neoliberal Manifesto, published in 2019, maintains, among other howlers, that “fewer people are malnourished than ever before”. In reality, malnutrition has been rising since 2014. If Bowman is serious about being a defender of science, perhaps he could call out some of the falsehoods spread by his own organisation.
Lobby groups funded by plutocrats and corporations are responsible for much of the misinformation that saturates public life. The launch of the Great Barrington Declaration, for example, that champions herd immunity through mass infection with the help of discredited claims, was hosted – physically and online – by the American Institute for Economic Research. This institute has received money from the Charles Koch Foundation, and takes a wide range of anti-environmental positions.
It’s not surprising that we have an inveterate liar as prime minister: this government has emerged from a culture of rightwing misinformation, weaponised by thinktanks and lobby groups. False claims are big business: rich people and organisations will pay handsomely for others to spread them. Some of those whom the BBC used to “balance” climate scientists in its debates were professional liars paid by fossil-fuel companies.
Over the past 30 years, I have watched this business model spread like a virus through public life. Perhaps it is futile to call for a government of liars to regulate lies. But while conspiracy theorists make a killing from their false claims, we should at least name the standards that a good society would set, even if we can’t trust the current government to uphold them.
Why do we value lies more than lives? We know that certain falsehoods kill people. Some of those who believe such claims as “coronavirus doesn’t exist”, “it’s not the virus that makes people ill but 5G”, or “vaccines are used to inject us with microchips” fail to take precautions or refuse to be vaccinated, then contract and spread the virus. Yet we allow these lies to proliferate.
We have a right to speak freely. We also have a right to life. When malicious disinformation – claims that are known to be both false and dangerous – can spread without restraint, these two values collide head-on. One of them must give way, and the one we have chosen to sacrifice is human life. We treat free speech as sacred, but life as negotiable. When governments fail to ban outright lies that endanger people’s lives, I believe they make the wrong choice.
Any control by governments of what we may say is dangerous, especially when the government, like ours, has authoritarian tendencies. But the absence of control is also dangerous. In theory, we recognise that there are necessary limits to free speech: almost everyone agrees that we should not be free to shout “fire!” in a crowded theatre, because people are likely to be trampled to death. Well, people are being trampled to death by these lies. Surely the line has been crossed?
Those who demand absolute freedom of speech often talk about “the marketplace of ideas”. But in a marketplace, you are forbidden to make false claims about your product. You cannot pass one thing off as another. You cannot sell shares on a false prospectus. You are legally prohibited from making money by lying to your customers. In other words, in the marketplace there are limits to free speech. So where, in the marketplace of ideas, are the trading standards? Who regulates the weights and measures? Who checks the prospectus? We protect money from lies more carefully than we protect human life.
I believe that spreading only the most dangerous falsehoods, like those mentioned in the first paragraph, should be prohibited. A possible template is the Cancer Act, which bans people from advertising cures or treatments for cancer. A ban on the worst Covid lies should be time-limited, running for perhaps six months. I would like to see an expert committee, similar to the Scientific Advisory Group for Emergencies (Sage), identifying claims that present a genuine danger to life and proposing their temporary prohibition to parliament.
While this measure would apply only to the most extreme cases, we should be far more alert to the dangers of misinformation in general. Even though it states that the pundits it names are not deliberately spreading false information, the new Anti-Virus site www.covidfaq.co might help to tip the balance against people such as Allison Pearson, Peter Hitchens and Sunetra Gupta, who have made such public headway with their misleading claims about the pandemic.
But how did these claims become so prominent? They achieved traction only because they were given a massive platform in the media, particularly in the Telegraph, the Mail and – above all – the house journal of unscientific gibberish, the Spectator. Their most influential outlet is the BBC. The BBC has an unerring instinct for misjudging where debate about a matter of science lies. It thrills to the sound of noisy, ill-informed contrarians. As the conservationist Stephen Barlow argues, science denial is destroying our societies and the survival of life on Earth. Yet it is treated by the media as a form of entertainment. The bigger the idiot, the greater the airtime.
Interestingly, all but one of the journalists mentioned on the Anti-Virus site also have a long track record of downplaying and, in some cases, denying, climate breakdown. Peter Hitchens, for example, has dismissed not only human-made global heating, but the greenhouse effect itself. Today, climate denial has mostly dissipated in this country, perhaps because the BBC has at last stopped treating climate change as a matter of controversy, and Channel 4 no longer makes films claiming that climate science is a scam. The broadcasters kept this disinformation alive, just as the BBC, still providing a platform for misleading claims this month, sustains falsehoods about the pandemic.
Ironies abound, however. One of the founders of the admirable Anti-Virus site is Sam Bowman, a senior fellow at the Adam Smith Institute (ASI). This is an opaquely funded lobby group with a long history of misleading claims about science that often seem to align with its ideology or the interests of its funders. For example, it has downplayed the dangers of tobacco smoke, and argued against smoking bans in pubs and plain packaging for cigarettes. In 2013, the Observer revealed that it had been taking money from tobacco companies. Bowman himself, echoing arguments made by the tobacco industry, has called for the “lifting [of] all EU-wide regulations on cigarette packaging” on the grounds of “civil liberties”. He has also railed against government funding for public health messages about the dangers of smoking.
Some of the ASI’s past claims about climate science – such as statements that the planet is “failing to warm” and that climate science is becoming “completely and utterly discredited” – are as idiotic as the claims about the pandemic that Bowman rightly exposes. The ASI’s Neoliberal Manifesto, published in 2019, maintains, among other howlers, that “fewer people are malnourished than ever before”. In reality, malnutrition has been rising since 2014. If Bowman is serious about being a defender of science, perhaps he could call out some of the falsehoods spread by his own organisation.
Lobby groups funded by plutocrats and corporations are responsible for much of the misinformation that saturates public life. The launch of the Great Barrington Declaration, for example, that champions herd immunity through mass infection with the help of discredited claims, was hosted – physically and online – by the American Institute for Economic Research. This institute has received money from the Charles Koch Foundation, and takes a wide range of anti-environmental positions.
It’s not surprising that we have an inveterate liar as prime minister: this government has emerged from a culture of rightwing misinformation, weaponised by thinktanks and lobby groups. False claims are big business: rich people and organisations will pay handsomely for others to spread them. Some of those whom the BBC used to “balance” climate scientists in its debates were professional liars paid by fossil-fuel companies.
Over the past 30 years, I have watched this business model spread like a virus through public life. Perhaps it is futile to call for a government of liars to regulate lies. But while conspiracy theorists make a killing from their false claims, we should at least name the standards that a good society would set, even if we can’t trust the current government to uphold them.
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