One of the more funny/sad/tragic parts of this GameStop activity is the misplaced sense of populism.

People really think they're busting Wall Street, and sticking it to The Man.

No.

Wall Street is profiting immensely, and the Man is getting much richer, thanks to you.

There are a few key myths that add up to this misplaced populism:
- That Wall Street has a position on GameStop
- That it makes or loses money based on positions
- That regular folk are trading truly commission-free
- That regular folks have access to the same trading tools

Myth 1: Wall Street had a Short Position on GameStop

No, some hedge funds had a short position on GameStop, but Wall Street as a whole had relatively little invested in the company, either way.

And when one hedge fund gets its positions blown up, other hedgies profit.

In particular, here, Melvin Capital got its positions blown up.

Melvin Capital is a tiny player in the scope of Wall Street overall. It has a couple dozen employees and managed $7b.

You know who profits when it gets in trouble? People with even more money under management.

In the case of Melvin Capital, billionaires Ken Griffin and Steve Cohen bought into the fund this week, in what were assuredly fire-sale prices.

So, a $7b, 30-employee entity got into trouble, and two men worth $35b profited by getting to buy a chunk of it for cheap.

Populism!

Myth 2: Wall Street Is Losing Money On This

Even setting aside the outcome of Myth 1, where some rich guys lost money so that even richer guys could make more, the whole idea that Wall Street makes or loses money based on a specific bet is misplaced.

Wall Street is the casino.

Wall Street makes money when people trade stocks.

Until a few years ago, retail investors saw this through commissions on trades.

Now they trade "commission free" through Robinhood & etc., but they're still paying a price.

The price is just hidden a bit from the public.

The Wall Street model is built on making money off of every trade. Just because they don't charge explicit commissions, doesn't mean they gave up on that model.

Wall Street just switched the model to charge investors a different way.

A lot of people might wonder how Robinhood makes money, if it isn't charging commissions.

The answer is that, fundamentally, it's charging you more when you buy a share of stock, and giving you less when you sell a share.

It's a little bit more involved than that. I'll exlain.

One of the major ways of making money these days is through High-Frequency Trading.

Computer programs that can trade stocks at very high speeds, exploit tiny differences in price over tiny periods of time -- fractions of a penny in micro-seconds.

It adds up to a lot of money.

Those computer programs exploit the fact that you don't actually care about paying a few pennies different for your shares, or selling for slightly lower price.

Robinhood sells the information about what you're willing to pay to funds that trade in the middle.

You pay more.

So, we've established that Wall Street is built on a model of charging for every trade, even when it's not charging an explicit commission.

So when does Wall Street make the most money? When the volume of trading is up.

And the GameStop moves have generated historic volumes.

GameStop options on Tuesday generated more trading activity than any other stock's options, on any other day, in history.

Literally historic profits being minted on Wall Street, right now, over these GameStop moves.

Populism!

OK, that was really Myth 2 and Myth 3 bundled into one de-bunking.

People aren't trading commission-free, and Wall Street makes its money regardless of whether an individual stock is going up or down.

Myth 4: Regular Folks Have Access to the Same Trading Tools as Wall Street

Not by a mile. This was one of the more hilarious claims made by @chamath on CNBC the other day, talking about how retail investors have access to "the same compute power as the best hedge fund."

Nope.

When hedge funds engage in algorithmic trading (the only kind of trading where "compute power" really matters), they have better tools.

These include:
- Physical proximity. Their servers are parked at the exchanges, to give their algorithms a data feed that's updated faster.

- Economies of scale. They buy their hardware directly and host it at their own expense. Try to buy the same compute power from Google, and you'll be paying a retail markup.

- Proprietary data streams. They pay for heavily-machined data that is proven to provide a trading signal

- Teams of experts in coding, finance, hardware... you name it. If there's an operational area where they can gain an edge by adding a salary, they do it.

And so, whereas a lot of people, including some of the wealthiest folks in the world, seem to think this is the wisdom and power of decentralization winning in a crowd-sourced, Internet-based revolution...

No. The hedge funds are still minting, still more powerful.

Populism!

Myth 5: This Ends With Regular Folks Making Money

Sure, maybe, it could've been so, if this had stopped when GameStop was around $20/share

But it's now traded to well more than 20x what even the most optimistic person genuinely thinks it's worth

This doesn't end well for folks

It's hard to say exactly how much money retail investors have on the line right now.

Through a mix of different kinds of contracts and purchases, they've bid up a company's paper value to (depending on the minute) 3-6x more than any rational person thinks it's worth.

Is it billions of dollars of retail investors' money tied up in the idea of GameStop being worth several times more than anyone thinks it is?

I'd guess it's billions, given the mix of the market cap, plus the extremely high volumes of trading, and anecdotes. People bought this.

It inflates people's portfolios on paper for a while.

A week? A month? Hard to say.

But at some point, someone's going to pay for the difference between its valuation at peak, ~$25b, and what the most optimist think it's worth, ~$6b

And retail investors will be the ones paying

Wall Street makes money on the way up, and Wall Street makes money on the way down.

But individual people are going to lose, and lose big, because they're walking around paying hundreds of dollars for pieces of paper no one really believes are worth more than $20.

Retail investors will be the ones left holding the bag, as it deflates from $25 billion, to $6 billion or less, and Wall Street will have historic profits.

Populism!

Myth 6: Regulating Now is an Effort to Protect Wall Street From Losses, Just When Retail Investors Show They Have Power

No.

Retail investors will be the ones losing out in all of this, and Wall Street and hedge funds will have profited more from the added activity.

Most rules and regulations exist to protect investors, and especially retail investors, from throwing their money away.

That's a good thing.

This GameStop trade is retail investors throwing their money away, while Wall Street profits

It'd be good for people if we could halt it

There's nothing good for average folks, from an investment or financial standpoint, in allowing this kind of trading activity to occur.

The only reason this activity isn't banned already is because of First Amendment, freedom of speech rights.

First Amendment rights are very important, and we need them to make our country work the way we intend.

But they have nothing to do with helping retail investors keep their money. For folks trying to not lose the money they've earned, this is all bad news.

And so, we have a system that's generally set up to extract money from retail investors when they trade in this manner.

And banks and regulators trying to halt it.

But people on the long-GameStop side don't want this trading activity to stop.

Populism!

Myth 6: Retail Investors Seize Power & Wealth By Trading Individual Stocks

This is the biggest underlying myth here, and both the most pervasive, and the most harmful to average investors.

People don't make money by trading individual stocks, over the long run.

As best as we can tell, no one escapes this reality. If you choose to buy and trade individual stocks, you will, eventually, end up with a relative loss.

Study after study shows this to be true.

Embedded in this myth are a bunch of mini myths, mostly about professional investing.

Think hedge funds generate better returns than the market?

Nope, overall hedge funds performed worse than US Treasuries, from the very first hedge fund investments, through 2013.

So how do hedge funds make money?

Largely through their fee structure, not gains.

But what about X investor, who had a great 20-year run?

Well, we don't hear about that investor's 30-year run, and that's the point. Across millions of participants, active investing will generate a handful of people who get lucky over decades.

We treat them as geniuses, but no

Nobody beats the market, consistently and over the long term, by investing in individual stocks, without some kind of special edge or money-making mechanism, like charging commissions or fees, or employing high-frequency trading.

If you look at a bunch of successful hedge funds and think, "well, they made money"?

Selection bias. They are the ones that succeeded for decades and therefore stand out.

What about Warren Buffett?

He's not just an investor, he's a manager. He changes the companies he invests in, brings in new leadership, and so on.

And these days, he gets preferred terms, too.

Retail investors, trading individual stocks, lose money overall. Full stop.

While Wall Street makes money on those trades.

Retail investment in individual stocks enriches Wall Street, at the expense of average folks.

Populism!

Truth 1: Be a Passive Investor

So, having assembled all these myths, it's appropriate to talk about an approach that does meet some populist goals.

An approach that:

- Makes average folks wealthier

- Generates fewer profits for Wall Street

Real populism!

As best as we know, based on immense numbers of studies, the surest way to see your money grow is to invest it in index funds, such as a low-fee ETF for the S&P 500.

Over any given 20-year span, the S&P 500 outperforms pretty much anything else.

And ETFs are low-cost.

By not trading actively, you don't end up giving a big chunk to Wall Street, either in commissions, or from paying higher prices due to high-frequency trading.

You profit more, Wall Street profits less.

That's real populism.

It's boring, but it's real.

Like other rigged games, the best way to win as a populist against Wall Street, is not to play

If you do play that active-investing game, you'll lose money, and Wall Street will gain.

Passive investing refuses that option, making you money, and holding it back from Wall Street.