Financial History 141 Spring 2022 | Page 38

BOOK REVIEW
BY JAMES P . PROUT
The Revolution That Wasn ’ t : GameStop , Reddit , and the Fleecing of Small Investors
By Spencer Jakab
Portfolio Penguin , 2021 270 pages with notes $ 29.95
Here ’ s an idea : take tens of thousands of men ( mostly ) between 18 and 40 who grew up playing Super Mario Bros . and Grand Theft Auto . Lock them down in front of computer screens for months on end . Set up an online platform where they can converse anonymously . Tell them that they can trade securities at any time , at supposedly no cost . And occasionally give them free stimulus money . It ’ s like a giant online financial playdate — only the players are adults , and the winners and losers are real .
That ’ s basically the story told by author Spencer Jakab in The Revolution That Wasn ’ t : GameStop , Reddit , and the Fleecing of Small Investors . Jakab , a sell-side analyst turned WSJ reporter and columnist , dissects an episode in January 2021 when an unruly band of retail traders ( David ) “ short squeezed ” the big bad hedge funds ( Goliath ). The post-mortem on this story was that just as David was about to smite Goliath , the rules of the game were changed . No , says Jakab , that ’ s not right . The rules weren ’ t changed — trading your way to success is a mugs game that ’ s been foisted on retail investors since the South Sea Bubble . Without discipline , without patience , retail investors are always at a disadvantage — and no amount of high-speed trading can change that , he concludes .
This is a personality-led tale , so Jakab starts with the character list right away : Keith Gill , a financial advisor who goes live with his belief in GameStop ( NYSE : GME ) stock ; Vlad Tenev , co-founder of online broker / trading platform Robinhood ; Steve Huffman , Reddit ’ s CEO ; Gabriel Plotkin , of Melvin Capital , a hedge fund particularly aggressive in the shorting of Game- Stop ; and Ken Griffith , billionaire owner of Citadel , a hedge fund and securities processing firm which takes order flow from Robinhood . At the center of the whole saga are “ the Degenerates ” ( Jakab ’ s label , not mine ): a hungry band of retail traders , who communicate through a sub- Reddit chatroom called “ WallStreetBets .”
With all these pieces in place , in 2019 the pace of the story speeds up .
GameStop ’ s business model as a video game retailer and renter looks to go the way of Blockbuster . It becomes a poster child for short sellers . Robinhood signs up record numbers of retail investors , drawn to its frantic pace , instant gratification and allegedly no cost . The website , writes Jakab , is designed to spur frequent — almost frenzied — use . You don ’ t have to read a lot of the WallStreetBets posts included here to feel the testosterone . Market wins ( and losses !) are compared as feats of strength and manliness .
After the pandemic lockdowns start in spring 2020 , commentary on Wall- StreetBets begins to coalesce around the plight of GameStop stock . Although they are always focused on making money , the Degenerates ’ chatter takes on a more populist bent . Short sales of any stock are publicly disclosed , and Melvin Capital ’ s short bets on GameStop look particularly greedy . In the week of January 25 , 2021 , the Degenerates think they have a chance to “ corner ” the short sellers , by taking the price of GameStop to a point where short sellers can ’ t cover their obligations . For a few days , it appears they have the advantage . Melvin Capital and others lose billions . Melvin gets a cash infusion from other hedge funds . Then it all stops . Overnight , on January 28 , 2021 , Robinhood ’ s clearinghouse requires it to come up with additional capital to cover the outstanding GameStop positions in its customer accounts . Robinhood draws down its lines of credit and gets more money from its backers . In addition to increasing its capital , it also “ restricts ” further trading in GameStop stock and others , which essentially prevents the Degenerates from continuing the squeeze . Robinhood ’ s retail investors are stuck as the air goes out of the GameStop story . Citadel bails out Melvin Capital , while it processes the flow of trades from Robinhood .
I won ’ t spoil the ending . GameStop is still around , as is Robinhood . Jakab does an excellent job explaining how all this worked together , particularly short selling . So , if you still can ’ t figure out how someone can sell something they don ’ t own , you ’ re in luck . And readers are reminded that as the GameStop story unfolded , a lot of people on the sidelines made a lot of money betting for and against the Degenerates . It ’ s a good read on how the plumbing of Wall Street works .
Inevitably , the GameStop drama engendered hand-wringing ( including Congressional hearings ) about how the little guy can ’ t win on Wall Street . And Jakab agrees . But he doesn ’ t have a lot of sympathy for the Degenerates . Retail investors are always the ones who pay the most , and lose the most . His final chapter has some simple lessons for retail investors : slow down , use indexing and be extra careful when somebody tells you they have a system to beat the market .
James P . Prout is a lawyer and business consultant . This is his 20th book review for this magazine . He can be reached at jpprout @ gmail . com .
36 FINANCIAL HISTORY | Spring 2022 | www . MoAF . org