Algorithms, not People, Caused the GameStop Squeeze
Buy the rumor, sell the news
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In my last post, I claimed that the principal agitators in the GameStop squeeze were algorithms, not people. I said that the David vs Goliath narrative is, while seductive and simplistic, simply not true. I got some private pushback on that claim. It’s understandable, I suppose: people don’t want to cede their superiority to the machine. Therein lies dystopian science fiction, and who wants to live in dystopia?
But, let’s consider the following sequence of events:
Someone by the nom de plume of DeepFuckingValue posts to the WallStBets subreddit about GameStop.
A bunch of other people like, comment, share, and otherwise highlight the post.
Reddit’s algorithms kick into high gear, intuiting that this is a popular post, and so feature it more prominently.
More people join in the fray. Feedback loops begin to do their thing.
Robinhood’s highly-designed and -gamified app stands ready, willing, and able to accept the Redditors’ buy orders for GameStop’s shares.
Robinhood’s algorithms farm out those buy orders for GME to various high frequency trading firms, who buy that order flow from Robinhood (and other no-fee brokerages).
Those high frequency trading firms dump the retail order flow data into their trading algorithms, and front-run the retail orders. (To be clear, the data they dump into their algorithms doesn’t just contain data about GME buy orders, but data about all no-commission retail buy and sell orders.)
So, where, exactly, is David in all of this? In the myth, David is a savvy strategist and tactician who undertakes to fell the much larger Goliath. But in the scenario I just laid out above, the only people are a bunch of Redditors whipped into a trading frenzy by an algorithm, which induces them to buy stocks, the data of which is fed to another algorithm. It’s algorithms all the way down.
Sure, there are humans behind the algorithms, but these people are not the David to which the facile refer when they claim that David vs Goliath is the correct rubric with which to understand what happened with GameStop’s short (or gamma) squeeze.
No, the correct interpretation is that a bunch of algorithms sicced people on a stock, and those people responded like the pawns they are.