In my first Power of Markets article I made the argument that markets are the most powerful man-made force shaping human civilization. I asserted that even the most powerful entities respond to market forces. That article went live on December 23rd, 2020. Almost exactly one month after, the market activity involving shares of the company GameStop became a case in point for the arguments made in that article.
The roots, ends, and impacts of that activity were largely negative, but it was a significant example of the power of markets to harness collective financial action. In this follow-up piece, I will expand upon how the market forces embodied in the GameStop saga can be put to more positive application.
The Comic Tragedy of GameStop
In late January 2021 the stock price of GameStop ripped up almost 2,000% from $17.69 to $325.00. Retail traders undertook an epic short squeeze that ultimately caused at least one hedge fund short the stock to require a multi-billion dollar bailout from another hedge fund. Many people, including those participating in the short squeeze, saw this as the little guy sticking it to Wall St. Popular responses ran the gamut from cheering on Main St. to assurances of investigations of market manipulation from regulators. For almost two weeks the world was transfixed with bemusement and trepidation by this apparent example of David slaying Goliath. For all the cheers for the little guy, there were also cries that the stock market was broken.
Underneath the comedy lurked dark tragedy, however, rooted all the way back to the 2008 financial crisis. Examples emerged of those who had participated in the squeeze by dumping their entire savings into the trade. Some people hoped to, and indeed did, make fortunes. Others seem to have had the sole objective of punishing Wall St firms, even at the cost of their life savings.
The causes and effects of the GameStop phenomenon were replicated across a number of other companies and assets. This may have felt cathartic for some in the moment. Unfortunately, it did not create sustaining change, or even impose the accountability these traders sought. The traders did, however, succeed in proving the power of the market.
Collective Financial Action
If we move past the drama and abstract the mechanisms, what we find is an example of collective financial action. A large group of people, motivated by a common cause, pooled their buying power to drive an outcome; in this instance to punish Wall St. Suddenly hedge funds were reviewing their short positions, and politicians and regulators were forced into action. The most powerful entities responded to market forces.
Here is the critical takeaway: the collective buying power of large groups of ordinary people, organized via markets, has the power to create incentives that invoke concurrent and swift action from businesses, politicians, and regulators. It is hard to overstate how the combination of technology and markets has the potential to change the equation of leverage. Historically, corporations have used the leverage of their concentrated power for targeted corporate benefit. The GameStop example shows that consumers, using technology, now have a means to organize and create their own leverage. Instead of a tool for vengeance, it can be used to create positive incentives.
An Ethic Short Squeeze
There are many companies that are “short” ethical behavior related to the environment, employees rights, diversity, equity, governance, and sustainability. They lobby the government for protections from accountability and transparency, which makes it hard for consumers to make informed consumption decisions.
Companies that operate with transparency and sustainability see this as an opportunity. Consumers have the power to squeeze unethical companies out of the market with their buying power – collective financial action akin to the GameStop traders. Patagonia is perhaps the most well known company making sustainability core to its business model and winning customers, which in turn provide it more resources to succeed and create more sustainable products. A more recently founded example is Allbirds which manufactures sustainable shoes. Markets have the power to make companies like Patagonia and Allbirds the rule rather than the exception. Some examples of market-driven tools product managers have designed are ThinkDirty and Yuka. These products help consumers make more informed purchasing decisions related to the health aspects of products. DoneGood’s market applies a similar concept for eco-friendly, fair trade, and organic products. Even Amazon, a bugbear of environmentalists, is getting in on the action with its Climate Pledge Friendly portfolio.
Markets have the power to organize people, and their buying power. Product managers have the opportunity to channel that power through market and product design. The GameStop script can be flipped from one-off punishment of perceived bad actors at great cost, to sustaining systemic change at little cost, through collective financial action that consistently rewards good actors.
About the speaker
Serial entrepreneur, adviser and investor with experience building successful, disruptive technology startups. Industry speaker and panelist. Domain expertise in regulated financial markets, market structure, trading technology, electronic marketplaces and exchanges, blockchain and distributed ledger technology, cryptocurrencies and crypto assets. International experience in North America, Latin America, Europe and Asia spanning product, strategy, operations, and business development. 12 market/exchange launches in multiple jurisdictions (N America, Europe, Asia) and asset classes (equities, futures, precious metals, cryptocurrencies).