GameStop saga: a cautionary tale for future democracy?

Will social media trading frenzies provide guidance on future forms of decentralised governments for and by the people? Or is it a cautionary tale on the dangers of mass-manipulation and a mob mentality that may hinder sound and proper government and public good?

In the past few months the stock market has been the stage of a social media-fuelled trading frenzy, with Gamestop (GME), a brick-and-mortar videogame retailer caught in the centre stage, along with several other underperforming (but popular among redditors) stocks. The phenomenon made headlines, fuelled conspiracy theories and even triggered Congressional hearings by the U.S. House Financial Services Committee to ascertain any wrongdoings perpetrated by the different sides of what some might call a David vs Goliath scuffle between Wall Street and Main Street.

What started with a trading enthusiast that went by the alias of Roaring Kitty (or DFV, as was known in the WallstreetBets subreddit) covering and sharing technical and fundamental analysis on GME on its YouTube channel to a few dozen followers, arguing that the stock was then fundamentally undervalued (trading around less than 5 dollars per share at that time), has turned into one of the most bizarre and exciting market occurrence in years. A perfect storm-mix of bored and mostly unqualified retail investors with fresh cash, online forums with little to no moderation, ridden with meme culture and crass language, fuelled by a desire to “stick it to Wall Street”, has launched the stock into the stratosphere, with GME going from a small cap company to large cap in the timespan of little more than two weeks, with the stock trading at more than 400 dollars per share at its peak, after going up more than 700% in three trading days.

Some retail investors turned into millionaires overnight, enhanced by somewhat reckless derivatives trading strategies, leveraged margin accounts and a “yolo” mindset, while some institutional investors lost vast amounts of money, it being reported that at least one hedge having to be bailed-out by external investors after losing about 8 billion dollars in a single month, mostly due to its short interest exposure to GME.

Then, faced with this highly unusual trading activity, several investing apps that enabled market access to the hordes of retail investors, restricted trades on GME and several other “meme stocks” that were being discussed in WSB. This decision did not sit well with the trading community of WSB (which, given the media coverage of the phenomenon, had since increased its user base on the WSB subreddit from little less than a million to over 7 million subscribers in just a couple of days, who had joined in the ranks in hopes of get-rich-fast promises). Accusations of market manipulation and hedge fund meddling rocketed around the internet and prompted US Congressmen from both sides of the aisle to come forward in favour of retail investors, asking for an investigation to this practise that had in turn caused substantial losses to retail investors who had invested in the stocks in previous days at already inflated levels.

In parallel, the WSB community fought back and started promoting a list of brokers who would still accept purchase orders to those stocks, causing the stock to, once again, climb back up in the next day, greatly benefiting the influx of new clients to these brokerages along the way, simply due to the mere fact of them refraining from meddling with market access of retail investors and allowing them to make their investment choices freely.

In light of this, we should be asking ourselves the question of whether we are now in the face of a new investing era, where retail investment will be driven not by fundamental evaluations but by the mere perception of value that social media and meme culture ascribes to certain assets. Will the traditional investment advisory firms and investment banks face competition from a sort of decentralised and democratised community of retail investors, with no clear responsibilities for the investment advices being circulated throughout internet forums such as WSB (which more often than not consist in funny songs and humorous meme takes about a stock)? Or should the traditional players, including regulators, restrict this sort of mass behaviour under the cover of preserving the common good and the guise of market stability? What is certain is that both regulators and Wall Street have taken notice, putting in place algorithms and AI to track forums and social media activity surrounding these internet-driven investing flows.

Just as social media appears to be changing investment and decision-making in the financial markets, should we expect that all parts of our lives to follow the same path? Will democracy in the future be subject to the same rationale of functioning? Should governments be prone to influence in the near future by a decentralised movement of citizens with doubtful qualifications to be deciding (or forcing a decision) on matters they may or do not understand or which could cause more harm than good?

Taking local government as an example, would it be beneficial that city governments be subject to the masses’ notions on certain issues in any given time, by way of mobilising citizens to force cities to decide on matters purely driven by whomever makes the most noise on social media? Would this sort of decentralized decision-making process, potentially resulting in chaos, be an argument against decentralised democracy solutions, such as blockchain voting? One could argue that there may be a fine line between true democracy and anarchy if government decisions are dependent on faceless and unmoderated voting proceedings. Or would the benefits of such systems outweigh the potential risks, by paving the way to truly achieving a direct and complete democratic form of government that would embody at each given time the will of the voters, regardless of their qualifications or intrinsic understanding of the decisions being made in such a way?

Needless to say, the whole purpose of decentralization is to put decision-making in the reach and hands of the citizen and not centralised authorities. Is decentralised democracy the true way of achieving Aristotle’s concept that “democracy is when the indigent, and not the men of property, are the rulers”?

The increasing influence of social media in society and the ever-growing will of the common man to be heard and empowered with decision-making power in all aspects of life may well call for this issue to be considered when the public governance of the cities of the future is concerned. So, the question remains, and we believe only time will tell: is the GME saga the first manifestation of a long-lasting trend of a true decentralised form of self-government, or a cautionary tale for future democracy?

José Miguel Carracho

José Miguel Carracho

Associate | Vieira de Almeida
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