The ‘Gambler’s Curse’: finance traders upstaged by their own tactics

Feb 21, 2021

When a trading “rabble” hit financial markets in late January, with retail investors – the “Main Street Traders” – putting a squeeze on Wall Street’s squeeze of GameShop, financial journalists were furious on behalf of the merchants of debt who offer nothing but their own enrichment.  

As US Congresswoman Alexandria Ocasio-Cortez said:

“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino, complain about a message board of posters also treating the market as a casino” 

The upset by the “Main Street Traders” ruined the secrets of multi-billionaires, who were scandalised by the lowly public using financiers” tricks – invented around the 1870s – when firms dispensed with actual owners and made ownership “limited” by securitising ‘shares” and giving management “limited” liabilities.

After the 1929 stock market crash, American jurists Berle and Means pointed out that stockholders did not own the corporation, but just the right to sell parcels of stock. They argued that trading did not improve the firm’s activity.

Financial markets have little to do with productive economic activity. During the dot com futility years ago, Wall Street traders were pushing comical internet stock, claiming that it meant a “new economy”, but it was only worse than the old rapacious one. Trading activity is centuries old and sabotages people’s lives when a crash creates a depression, as it did in ‘29, and during the dot com “crash”, the Global Financial Crisis and many other times. And it will do so again. 

In financial markets, everyone must simultaneously be a seller and buyer of claims to future income. How can mere claims be assessed? The sociologist-economist André Orléan argues that the liberty to sell relies on a collective undertaking in a market (not lone individuals) to hold each security over a long term. Fears for liquidity (saleability) are mollified by everyone being both buyers and sellers. Yet when “too many” buyers or sellers build up, as a result of copy-cat behaviour, there’s either a bubble or a crash.

Many economists maintain that this collective “mimetic desire” (Orléan) for liquidity can fragment. Traders might copy favourable moves towards buyers, which boosts price mark-ups in, say, housing assets and to a bubble. Conversely, more may turn to selling until no-one can squeeze out the door fast enough. This is the “Gambler’s Curse” – precisely when does one cut one’s losses? 

No one can say, and so traders search for “The News”, Keynes argued. The key news is not world-shaking but is the last second’s trading market news: all guesses of bets on guesses.

The proponents of unfettered finance trading argue that dumb traders rely on gossip and “diffusion” of rumours (The News!), whereas smart traders can predict the future from the “fundamentals”. But these “predictions” are just algorithms of past trades on past stock, not “the future”, boosted by “The News” of recent trades.

No past stock (such as coal sales) can magically “reveal” the future climate catastrophe in its many forms; nor did a stable situation exist after health “care” was increasingly privatised and, in the name of profit, precautionary measures like quarantine clinics abolished despite recent pandemics and the credible predictions of more to come.

The effects of algorithm-driven trading are further exaggerated by practices such as short selling. It’s not only that shorting is irrelevant to economic activity, but it furthers inequality daily, garnering fabulous riches to the finance sector via speculation. 

It’s also that the size of lending for speculative bubbles and crashes can expand so dangerously as to stop economic life. A thorough depression descends only when banks and near banks are lending heavily, but not on socially useful, lasting projects with solid returns. 

As American economist Hyman Minsky famously said: “Bankers are merchants of debt.” They have expanded into wealth management and are again able to mix their speculative trades with their plain vanilla mortgages. When they are recklessly over-extended, banks are now so vast, and hold most of the money we use, that governments – i.e. taxpayers – are forced to bail them out. 

Investment banks, hedge funds, brokers and other finance industry participants also indulge in creating new tricks and cons, grandly called innovations. They all rely on caveat emptor – blame the buyer “fine-print” trick. But buyers cannot investigate banks’ books for faults, unlike a used car.

The financial markets also make use of lending in ways that inflate trading volume and further increase risk. Traders borrow via margin call loans for buying stocks or currencies. When the hope is the asset will increase in value, traders are “going long”. “Shorts” are selling assets that traders do not own, on the bet that they can buy them back at a lower price. If either “future” is not met, bank lenders instantly call in these margin loans.

In the case of the Main Street traders aping these repellent tricks and collectivised via a Reddit platform, they went long on an asset (GameStop) that Wall St hedge funds were busy shorting. Wall St losses were about $5 billion by January 30, 2021, and their efforts were thrown at retrieving losses. 

Some Main Streeters won by getting out the door fast: apparently a 10-year-old gained a lot while others sold “too late”. Some argued they just wanted to disrupt Wall Street. Hedge funds complain that the Reddit platform infringes the law on collusion between traders; but what is a hedge fund other than the collectivization of capital for the purpose of share ramping and other destabilizing tricks?

Ultimately, finance traders give no information about anything useful. The “Main Streeters” also aimed for profits and revealed the repulsive tricks that Wall St deploys to destroy opportunities for other people. Banks and their derivative financial actors are high priests of mysticism worshipped by finance economics. What is needed is a democratically decided “financial repression” of the allegedly “oppressed” billionaire rabble.

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