With thousands of people working together to pump money into a rarely traded stock, doesn’t the Wall Street Bets Gamestop situation perfectly fit the definition of market manipulation? But with no genuine fraud or organized scheming, how is this any different from any other investments or even hedge funds?
by Maanas Shah
I’m sure almost all of you have at least heard about the Wall Street Bets (WSB) Gamestop (GME) situation Around early 2021, a group on Reddit called Wall Street Bets (a joke forum regarding stocks) decided to invest in GME as one of their many joke investments. However, unlike any of their previous joking actions, many of them went through with it and the stock shot up several hundred percent. This, of course, caused those in on the joke to make very real fortunes off of the process, and, as such, the story went viral.
However, as the situation reached its peak, some investors and entities called out WSB for market manipulation (a federal crime which, as the name suggests, is illegal and planned manipulation of the market via some sort of group scheme). The investing platform Robinhood even banned the trading of the stock temporarily. However, many others argued that what these individuals did was no different from the hedge funds (a partnership of investors to pool funds to hopefully be able to make a large return using advanced trading techniques) on Wall Street, and that there was no planned ill intent, especially since the whole event was relatively unplanned.
Here is where the Trilemma lies: are the members of WallStreetBets market manipulators, innocent investors, or maybe a mix in between?
A general definition for market manipulation is “a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market.” The main takeaway from this definition is a “deliberate attempt to interfere.” Though admittedly, this definition is rather vague, it is possible to interpret the WSB GME situation as such. Their goal was to all invest into a random, low traded stock with the hope of creating an artificial demand that they would then be able to profit off of.
If we want to compare this incident to more specific scenarios, we should turn to the idea of a “pump and dump” scheme. This is a form of fraud in which the goal is to boost a stock’s price (usually a low traded one) artificially or fraudulently to make a quick profit. It basically involves the “pumping” of investments rapidly into the stock to quickly raise its price and then selling at that high price, causing the profit and the subsequent crashing of the stock, hence the “dump” part of the name. We can clearly see this sort of peak and crash pattern when analyzing the GME situation. After the WSB posts, the stock saw an influx of investments and it quickly grew over 700% after a few days. As investors started to cash out by selling their shares we saw an equally rapid spike downwards, once again matching the model of this type of fraud.
Though it could be argued that these applications may be a tad far fetched or misconstrued, the definition, as seen above, is quite vague to begin with. So, of course, we must interpret each situation as it is and try to apply it to the general outline.
While we’ve seen how it's possible to align the actions of WSB with those of fraud or illegal activities, one important aspect to consider is intent. WSB has had a long history of joke investments and investing into dying companies; it’s what the forum stands for. So is it really that hard to believe that as the website (Reddit) grew more popular over the years, one of WSB’s jokes might have actually gone through? It’s almost impossible to ever prove there is ill intent in the first place for many situations, but when you take into account the context of WSB and what it stands for it becomes even harder to do so. Even the name itself, Wall Street Bets, is a joke alluding to the ridiculousness of their proposed investments and actions.
Another important argument to consider is hedge funds and their legality. As stated earlier, hedge funds are when investors pool their investments to procure more advanced trading options and to hopefully obtain a profit from this limited partnership larger than they could alone. With this general definition, we can note some similarities with WSB and their actions regarding GME, mainly in how they’ve pooled their users' funds to allow them to each individually be able to profit from the larger investment into GME. Noting how it is a legal profession for those on Wall Street to actively be a part of such hedge funds, many people argued how it was ridiculous that it be deemed “market manipulation” when a group of average people tried to make profits from it as well. They called it hypocrisy from those higher up in the economic cycle - those on Wall Street and platforms such as Robinhood.
As previously mentioned, when dealing with situations like this we need to interpret the situation to existing definitions of legal or illegal actions and see what fits best. Similarly, we can see how here the situation can fit into the definition of a perfectly legal practice as well.
Even in the professional economic industry, crimes such as “market manipulation” are incredibly vague, and much is left up to interpretation when trying to classify an action as such. As a result, it's much more likely that the answer to this question is not a complete yes or no, but rather somewhere in between. We have seen questionable aspects to the WSB GME situation, but we have also seen a lot of innocent attributes as well. And, of course, with the previously mentioned vague wording, and how it can be applied to both fraud but also perfectly legal activities, it might just be more accurate to say this situation is a bit of both: innocent investors with a hint of accidental market manipulation.