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Published: Feb 01, 2022 8 min read

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A man stops and looks at the GameStop store in New York City
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The GameStop trading frenzy was when everyday investors teamed up to beat the pros at their own game, right?

Wrong — in fact, the whole saga was actually a real money maker for Wall Street. That’s according to Spencer Jakab, author of the new book “The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors” and editor of The Wall Street Journal’s “Heard on the Street” column.

Jakab's book centers on the GameStop stock price surge that garnered massive attention in early 2021. Wall Street and Main Street became obsessed with the story of how everyday investors on the subreddit r/WallStreetBets started a bull case for the video game retailer and pushed its stock price from around $20 at the end of 2020 to more than $300 by the end of January 2021. Short sellers like hedge funds paid the price, fueling a stick-it-to-the-man attitude among retail investors. Other familiar-but-struggling companies like Hertz and AMC joined the meme stock fray.

But the GameStop story also led to heightened scrutiny over payment for order flow, the controversial way in which trading apps like Robinhood are paid for customers’ trades from “market makers” like Citadel Securities. And in the end, Wall Street might have been the winner after all.

Below is Jakab’s conversation with Money, edited and condensed for clarity.

Why do you think the retail traders didn't actually beat the pros?

Once the dust settled, a few things became clear. One was that [retail investors] basically had two goals: to make money, and to stick it to Wall Street. I don't think that either one of those things were accomplished.

In terms of making money, obviously individuals did make money. But as a group, you can see that they didn't do nearly as well. And because the same group more or less has tried to make lightning strike a second and third and fourth and fifth time by forcing more short squeezes — which has been a very expensive exercise — it's been a real money maker for Wall Street writ large.

So not only did these people not make money, but Wall Street likes it when people get excited about something. They like it when there's a lot of volatility. Whenever there are people coming to the market who think that they can do well and that they figured something out that lots of people on Wall Street haven't, they generally make a financial contribution to Wall Street and not to themselves.

Is there a way for everyday investors to beat Wall Street?

Yes, there is.

The technological forces that made it possible for you to have an app in your hand where you pay $0 to buy and sell stocks are the same forces that have made it possible for you to buy an exchange-traded fund that owns hundreds or even thousands of individual stocks, and pay pennies per year to own it.

There are some people who are very active, who pay more than their toll to Wall Street. And then there are other people who are very passive and basically make use of its services but don't leave a lot of their money with Wall Street. Be one of those people who buys a handful of stocks or a handful of low-cost index funds and barely looks at them. If you want to stick it to Wall Street, then don't play its game.

Courtesy of Penguin Random House

How was the GameStop story unique?

The unique aspects really were technological. You had these intuitive, colorful gamified trading apps in millions of people's hands. That made it very simple to trade and allowed them to trade things like options, even when they didn't totally understand what they were doing.

And, of course, you had social media that amplified certain voices over others and so it amplified, in this case, the wildest, most reckless voices. That's something that hasn't existed in the past. There have always been people touting something and telling you to do things, and people who are very confident always have had undue influence over people financially. But this just magnified it.

Young investors poured into the market, some because of the meme stock frenzy. Is that a good thing?

On face value it’s a good thing for young people to be opening brokerage accounts.

But I see it playing out three ways. Some minority of the people who open brokerage accounts for the first time in the last year or two will kind of sober up and snap out of it, and turn those accounts into a way to build wealth for themselves.

Some other minority of those people already have taken a very bitter view of Wall Street, but continued to kind of throw money against the wall. You've seen that continue again and again, where they're trying to make lightning strike a second or third or fourth time by recreating this exciting short squeeze that happened in January 2021. That’s, with exceptions, a losing exercise.

And the largest group are those people who will be bitter and just kind of walk away. They'll figure that Wall Street is rigged. That group is costing itself a lot of money too because, if you don't begin to save at a young age, how else are you going to compound your wealth?

What does this mean for financial markets moving forward?

Unfortunately, some subset of the young people who got into this are kind of in it. They're excited by the speculative aspect of it, and they're going to look for a bigger and bigger hit of that dopamine.

Meme stocks, crypto, NFTs and online sports betting are all part of the same continuum in my mind. And that's not by accident. Even though human psychology — the fear and greed that causes manias and panics — hasn’t changed, businesses' understanding of human psychology and which buttons to push has improved a lot.

They understand how to create a product that gets you hooked, that makes you want to come back, whether or not you're making money doing it. The same thing that is built into the flashing lights of a slot machine is built into the flashing lights on a trading app, unfortunately.

Those trading apps are moving to more and more volatile speculative areas because the bigger the sort of lottery ticket like element of it, the more exciting it is to people who participate. Luckily, that's only a minority of people involved in this. But [companies] know how to get that gambling instinct going right to the person who's wired for it.

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