For those who don’t have a pressing reason to follow the financial press, the activities of a bunch of day traders and hedge fund managers is the kind of subject that can reliably make even the most restless minds slip into a comfortable slumber. Short squeeze, margin call, gamma squeeze, what? But for the better part of a month in early 2021, it was almost impossible for anyone to look away from the market.
That was when a troubled video-game retail chain based in Grapevine became, seemingly out of nowhere, the crux of the new phenomenon of meme-stock trading, wherein a bunch of online commenters organize to bid up the price of a stock by buying it en masse and holding on for dear life (or HODL, in web parlance). In the case of GameStop, a chain of brick-and-mortar stores with some obvious similarities to the late Blockbuster Video, the stock price had been sliding for years before it shot up in early 2021 as a horde of individual retail investors, acting on plans hatched and shared on the Reddit forum r/WallStreetBets, bought the stock—and bought it, and bought it, and held it.
Like so much online herd behavior, it seemed like an elaborate in-joke, a sarcastic prank. It didn’t seem likely that so many people suddenly believed GameStop was wildly undervalued and that the company’s leaders had a killer strategy in place to fix that. But many of the meme traders were, in fact, deadly serious about what they were doing. Because many traditional Wall Street investors don’t just bet on stocks rising but also take short positions to speculate that a stock will decline, the meme traders were effectively poking a stick in the eyes of the old guard, denying them their seemingly ill-gotten gains from betting on GameStop’s demise. (A handful of other companies whose stocks were similarly bid up by meme traders in the same time period, such as the movie-theater chain AMC, were also navigating downturns in their businesses and being heavily shorted.)
From January 4, 2021, to January 29, 2021, GameStop’s stock rocketed from $17.25 to $325, a nearly 1,800 percent increase. And indeed, some hedge funds, such as New York–based Melvin Capital Management, that had taken big short positions in GameStop were left devastated. Melvin lost more than 50 percent of its value, or nearly $7 billion, in roughly the first month of 2021.
A narrative emerged, stoked by breathless media coverage and giddy cheering from professional provocateurs such as new Texan Elon Musk, that a kind of people’s revolt was overthrowing the oppressors by using the very same sort of financial bully power that for so long had allowed the rich to get richer while locking out the rest. The rise of new and free online trading platforms geared toward young people—most notably the app Robinhood—was ostensibly “democratizing” finance, much as the internet had done for so many other industries, from media to real estate. A rogue army of anonymous day traders in their basements, posting online with handles such as Roaring Kitty and DeepF—ingValue, might just be radically reshaping Wall Street.
That was the prevailing wisdom, at least. But a new book by the Wall Street Journal’s Spencer Jakab, who regularly writes the paper’s influential Heard on the Street column, turns the takeaway from the GameStop story on its head. The book, The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors, which published in February from Portfolio, makes a convincing case that, in fact, the lesson of GameStop is that the house always wins.
Without getting into the sometimes-dizzying details of options trading, suffice it to say that the book’s argument hinges on the “free” trades that Robinhood offers. Like many other online platforms that offer their services for free to regular people, Robinhood makes its money by selling those regular people to other businesses (think Facebook and Google selling ads against your personal data). In Robinhood’s case, it’s not selling advertisements but rather what’s called “order flow” to other financial-services firms. That is, Robinhood takes orders from its users but doesn’t actually execute trades. It sells that right to firms known as market makers for a small fee per trade. That means that the more trading that happens, the better Robinhood does. The more volatile the market, the better Robinhood does. And, of course, the more volatile the market, the more dangerous it is for individual investors who don’t hold sophisticated, diversified portfolios that hedge against exactly this kind of trickiness.
When Robinhood found itself, on January 28, with no choice but to halt the buying of GameStop shares or options (the volume of trading had gone so high that the company suddenly didn’t have anything near the cash on hand that regulators required as collateral to cover all the transactions), the stock’s rise finally topped out. Many of the latecomers to the buying frenzy found themselves holding the proverbial bag as GameStop’s price inevitably slipped back closer to reality. Many of the earlier meme traders had cashed out on the way up (indeed, HODL was more of an ideal than a reality for most). And some presumably made a fortune. But the revolution? Well, Jakab’s title is apt.
There are other ways The Revolution That Wasn’t points out that individual investors got hurt. For one thing, the amount of money hedge funds were losing as the price of meme stocks skyrocketed was so high that they had to begin dumping shares of other companies they held, too, just to collect some cash, and this had the unintended effect of pushing down the value of the larger market and hurting the hard-fought savings of regular people. And one of the sharpest ironies is that Robinhood also makes money by allowing customers’ shares to be lent out to facilitate short selling by the pros. Far from destroying the shorts, in other words, the meme traders were unwittingly helping them out in the big picture.
The point, as Jakab writes, is that “the event that put WallStreetBets on the map made a lot of rich people even richer.” He quotes Jordan Belfort, the former broker and convicted felon whose memoir The Wolf of Wall Street detailed a pump-and-dump fraud scheme he’d executed in the nineties. “I think what the average investor doesn’t understand is that Wall Street likes volatility—they make money on volatility, on volume, up or down,” says Belfort. Indeed, the market makers, the companies that buy Robinhood’s order flow, had some of their best times ever during the meme-stock mania. Virtu Financial reported the largest quarterly profit in its history, Jakab writes. Citadel Securities owner Ken Griffin’s net worth rose substantially, from $12 billion in September 2020 to $16 billion by September 2021.
Oddly enough, for as wild as the GameStop meme-stock mania was, the narrative of it that unfolds in The Revolution That Wasn’t is one of the book’s weakest threads—disjointed and simply not immersive. Jakab’s bona fides clearly earned him access to key figures in and around the drama and give him the necessary framework for understanding the events—but he doesn’t deliver what could have been a thrill ride through the depths of the internet and the heights of high finance. The story never manages to find its dramatic arc.
Also, don’t read Jakab’s book for the prose. Presumably to make up for some of the lack of authentic moment-by-moment drama, he overuses stock phrases and bro-ey shoptalk. It’s easy to imagine his intent was to create a kind of hard-boiled, staccato voice, telling a tale of financial intrigue in the pulpy style of a Jimmy Buffett novel. And with characters such as Roaring Kitty playing against some of the world’s biggest billionaires, that wouldn’t be a bad idea. But the effect, in this case, unfortunately seems to be a simple case of succumbing to clichés. Players punch above their weight, play cards close to their vests, kick hornets’ nests, smell blood, bleed red ink, and so on—all over the place, sometimes all in one sentence. “But now he was the prime suspect in rigging the game for Wall Street’s fat cats by restricting trading just as the squeeze had them on the ropes,” goes one key early sentence. You get the idea.
All that said, Jakab’s choice to write in alternating chapters of narrative and explanatory prose creates a reliable drumbeat of eye-opening insights, or at least things that make you go “huh.” The explanatory sections of the The Revolution That Wasn’t make it worth the read for anyone interested in thinking beyond the easy conclusions of the time.
Jakab has a Wall Street insider’s generally optimistic view of the market; he sees a big-picture system that works despite imperfections. At times he can come off as surprisingly trusting about, or at least sympathetic to, some of Wall Street’s more dubious practices—such as when he argues for the positive purpose of short selling as a corrective function that prevents bubbles. (Sure, but short sellers also are notorious for shady practices such as anonymously spreading misinformation on online trading forums in order to influence other shareholders to dump a stock and drive its price down.) But plenty of other times, Jakab points out fascinating patterns in the big picture.
He notes, for instance, that the practice of meme-stock trading arose during the COVID-19 pandemic, when sports betting faded because no one was playing sports. Recreational and professional gamblers needed something exciting to do, and that moment coincided, Jakab writes, with “some of the most thrilling conditions ever witnessed in the stock market.” Plus, Jakab cites evidence that a surge in new account openings at Robinhood correlated with the arrival of COVID stimulus checks. People had extra time and money.
What’s more, the culture of meme-stock trading, in which people post screenshots of their stock positions in search of upvotes and comments, rewards risky behavior and one-upmanship. “If person A with an untraceable pseudonym says he put a tenth of his money into a stock and person B claims to have made an all-or-nothing bet on a short-term price move that is a long shot, then B will get more upvotes and notice on a forum that embraces ‘retards’ and ‘degenerates,’ ” Jakab writes. “Even for those who don’t feel particularly confident in their investing ability and don’t publicly share their misadventures, seeing tales of wild bets displayed prominently on a site where they are seeking guidance from peers influences behavior.” Call it stunt trading for lulz.
And then there’s this. In an early passage explaining congressional testimony by some of the key players in the GameStop saga, Jakab skewers Robinhood cofounder and CEO Vlad Tenev for the very viability, or not, of his app as a way for investors to make money. When asked how Robinhood’s customers had performed in the market, “Tenev replied that they had collectively earned $35 billion over and above the money they had deposited. But how much had they deposited and what was their return? Would it be at least as good as just parking the money in an index fund? Tenev tellingly dodged the question, instead noting that his customers had more money than if they had just spent it instead.” (Tenev himself, it’s worth noting, saw his net worth more than double, to $2.2 billion, when his company went public a few months after the GameStop mania.)
That, ultimately, is the lesson of The Revolution That Wasn’t. Not only did the rebels fail to overthrow the empire—despite winning a few skirmishes—but the entire notion of retail traders beating the market’s returns is, as ever, dubious at best. There will always be a few outlier individuals who make a fortune on a few good trades. And there will always be professional Wall Streeters buying yachts while most of America watches the returns dribble in on mutual funds while fees to the brokers dribble out.
But the market, Jakab holds, is always a steady bet in the long run. “Aside from being aware of the ever-changing rules about taxes and retirement, the main thing you need to know is that people who get paid handsomely to choose investments and who have much better computers than you do struggle to beat the market. By far the best thing that people can do with their money is to invest in something simple and cheap and then think about it as rarely as possible—a luxury unavailable to earlier generations.”