Will Robinhood use the tech deplatforming playbook? Either way, investors lose.
In the midst of another blow to American institutional trust, the stock market will be attracting all of the wrong kinds of attention.
EDIT 1/30: Most of this analysis ended up being largely irrelevant, because the reason that trading was restricted was simply due to compliance with an Obama-era “consumer protection” regulation that effectively bans brokerages from servicing retail investors in situations like this. You can read more here: https://marginalrevolution.com/marginalrevolution/2021/01/why-was-share-trading-restricted.html
Robinhood, Webull, and I assume many other brokerages have banned the buying of certain stocks in order to “limit volatility” associated with the wallstreetbets / retail short squeezing of several companies, most notably Gamestop. I won’t waste further time on what the Gamestop phenomenon is, you already know. As of the morning of Jan 28, what isn’t already household news is that the major brokerages have decided they will no longer process buying of the relevant stocks, but are still allowing them to be sold. Banning the expression of demand for a stock, but allowing it to still be sold, forces the price of the stock down. All of the major /r/WSB play stocks (there are about 10-12 of them) are down at least 30% today at the time of this writing, some down as much as 80%. The price pressure that the people shorting Gamestop have been facing (which for awhile has been more than just hedge funds, and now includes a great deal of retail investors) is being relieved. The only thing you can do with these stocks is sell them, so shorts (representative of The Man) have been bailed out.
This is bad, this is unfair, this is wrong, this is a violation of free market principles that I care about, etc, etc. It has promoted a kind of Horseshoe Theory unification between populist politicians of right and left.
Though perhaps not significant enough unification to actually result in anything, given prior political animosity and tribalism MUST be the most important thing all the time no matter what:
There will be many articles written about that today. What I’m here to write about is the rhetorical tool that brokerages have at their disposal, which has already been honed by other tech and financial companies. Why shouldn’t Robinhood expect it will work for them?
The Tech Deplatforming Strategy:
Here’s a plausible picture of how it plays out from here: Brokerages will assert that it is their right as a private company to decide who uses their platform and for what purposes. They will say that some market manipulators have been buying securities in a coordinated fashion to enrich themselves at the expense of a smoothly operating market. They will say that members of /r/WSB have connections to conspiracy circles like Qanon or the MAGA/Trumpist crowd. (There are millions subscribers to WSB reddit, discord, and facebook content…can you imagine how easy it would be to come up with proof of a thousand such naughty connections in -any- group of several million?) If they get cocky enough, the media might point out that the demographics of WSB are overwhelmingly white men, meaning this whole event was never an inequality-improving transfer of wealth, (at least not how the identity-politics left conceptualizes it, where race and gender count more than whether or not you were actually poor). (Credit to Richard Hanania for noticing this possibility on the 27th, before any limitations had even taken place!)
From here, why can’t the brokerages say they just wanted to make sure their platform wasn’t used for evils like market manipulation by people who we can all agree Are Bad. I don’t want to make this a, “first they came for the conservatives” kind of thing, but isn’t that a relatively parsimonious explanation for what’s going on here? Tech and financial companies (which I generally love and am very appreciative of!) have recognized that they have a “get out of controversy free card” by tying those they deplatform or limit to the right club.
The other tool they have is to point out that limiting this trading activity was in the best interests of the retail investor. And they’re right in the sense that intraday trading is bad, you should never do it, you should literally only ever invest in low cost broad based index funds and never attempt to time the market. I support nudges that default people into index funds. For goodness sake, I run a discord subchannel that does literally nothing except shill Vanguard’s Total World Index Fund as the only thing you should ever buy on the stock market (https://investor.vanguard.com/etf/profile/VT)…
(I’m not your financial advisor, but if you are wanting to buy stock, you should actually just by this^)
But that’s a choice investors get to make, and it’s important for the very functioning of a stock market that they at least have that choice! I think they should never choose to pick individual stocks, and I think they should stay as far away from WallStreetBets as possible! Doesn’t change the fact that a default toward freedom is the only way that a market system like a stock exchange can work at all. If there are no people out there trying to short the bad stocks and buy the good stocks and find instances of too much optimism or pessimism, how can we have faith that what we’re buying will tend to have a fair price?
When government seeks to decide what kind of price movement and perfectly legal price discovery methods are appropriate…
Or when financial companies intentionally rip away the infrastructure of financial activity in crucial moments of high trading demand…it seems like a loss of trust in our institutions is guaranteed.
Which will, of course, bring along a “helping” of needless and harmful overregulation:
And in the case of the stock market, it’s really unfortunate because this is an institution that has actually worked great!
Now here comes a personal gripe. When new people get to know me and they learn that I invest in the stock market, is the default response going to be something about evil corporations, angry manipulative internet mobs, and hatred or adoration of either AOC or Ted Cruz? Must -every- institution be degraded in the -same exact- way?