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Short Squeezes and The Ethics of Reddit

Reddit Traders are engaged in class warfare—and a particularly impressive display of it. Here’s what happened in brief: a hedge fund shorted a stock, the Redditears pushed up that stock, the hedge fund lost billions of dollars. And here’s what that means:

When you short a stock, you borrow a stock without paying for it. Then you sell what you have borrowed. Say, the stock you borrowed costs, currently, $100. But what you owe the lender is not $100 but the stock. You are then betting that the stock will plummet to $10, say, so you can buy the stock back at $10 and then return it to the lender. That difference, $90, is all yours. Shorting a stock is hard core gambling. If that stock goes up, however, you have to pay more money to get it back and return it to the lender.

Think about it in terms of borrowing your friend’s bike. You think that fewer people will want to ride bikes in your town and drive cars instead because the price of gas is going to continue to go down (or whatever). So you sell the bike that you borrowed and then get $100 for it. Later, when fewer people did want to ride bikes, you buy one back for your friend just like his original, but only for $10, and then you return it to him. You just got an easy $90 for doing nothing but selling what wasn’t yours.

Okay, so the ethics of this are horribly straightforward: it is evil, nasty, and wrong to sell what isn’t yours and potentially lose your friend’s thing. That is fraud. It is fraud in claiming possession over a thing you do not own by virtue of the fact that you sell it. But it is also cheating. St. Thomas Aquinas says that there are two types of trading: one that procures a necessary good for another;

The other kind of exchange is either that of money for money, or of any commodity for money, not on account of the necessities of life, but for profit, and this kind of exchange… is justly deserving of blame, because, considered in itself, it satisfies the greed for gain, which knows no limit and tends to infinity. STh I-II.77.4

In this regard, the trader considers money to be his end. He buys a commodity—which is what a stock is—and then sells it for more money without having changed the commodity at all. It is the classic sin of wealth without work; if you didn’t work, a prelapsarian gift from God, to aid your neighbor and his needs, then you deserve nothing but death. This is the importance of value-add and honesty.

Nichole Oresme, a fourteenth century Thomist, actually condemned this practise when referencing the devaluation of currency. Insead of a stock, it was coinage. The king, bankers, and merchants, he says, could buy up the good coins before the king devalued the kingdom’s currency by alloying the coins with cheaper metal. He says:

Again, when the prince does not announce beforehand the date and the scheme of the alteration which he means to make, some persons, by their own cunning or through their friends, secretly foreknow it, and buy up merchandise with the weak money to sell again for the sound, get rich quickly, and make an excessive and undue profit against the lawful course of normal trade.

Oresme condemns this as a get rich quick scheme, which does not match the labor you put into procuring the wealth. In a real sense, the people are working for free without ever knowing it.

The same thing happens when the hedge fund manager that made money through shorting a stock goes to spend that money at the store, the store manager has to then give him whatever he wants in exchange for the money he bought without ever benefiting the community. Genuinely, he has given you something for free. The effort that the store manager poured into the economy to better people’s lives, by providing food for them to eat, did not match what the hedge fund manager did. The latter just has money and is spending it. So for those that say trickle down economics works, in our modern economy, it works like this: the wealthy do not work to benefit society and receive the rewards (money) of doing so; then they spend that money on real goods that normal people worked to produce. This is what I have called before a nation of slaves who do not know their masters.

But the Redditers caught wind of this modern day debasement; this get-rich-quick gamble. What they are doing is buying the stock so that the price goes up (for the sake of simplicity, we’ll continue to use our numbers), from $100 to $400. Now the hedge fund still needs to return their stocks, but they have to pay $300 more to procure them. The hedge fund has said they have stopped their bet, bought back the stock at a much higher price, and in the process lost billions of dollars.

So what are the ethics of the Redditears’ actions? First, off, should we, collectively, fight back? Oresme, following his Augustinian training, says that the hedge fund’s type of fraudulent financial technique is “a just cause for war.” Their actions harm the common good through an unapologetic focus on the private good. It ruins the livelihood of a people, enchants others to participate in similar get-rich-quick schemes, and must be stopped.

Second, is their method of fighting back—trading—a just means of doing so? This does not quite fall under St. Thomas’ permission for trading out of the common good, which is a different context than ours: “A man may take to trade for some public advantage, for instance, lest his country lack the necessaries of life, and seek gain, not as an end, but as payment for his labor.” In one sense, the Redditears have invested to rid the world of a hedge fund. That is truly a public service. But they may fall prey to the same Thomistic critique above that they will (inevitably) sell their shares and make a profit—in the case, of one, an $11 million profit—again, with no value-add. One thing you must really admire in this one man is that he is refusing to sell. He could make a real fortune, but he wants to take down the hedge fund. That is more integrity than I have. I would break under that pressure. So he deserves some laurels. But the form of this class warfare is precarious. It attacks the unjust by utilizing their same instrument, which was designed for injustice.

The stock market as a whole is a dangerous game that entices us to focus on the increase of money. Most of the time people do not care for the companies that they invest in—in buoying them up financially or aiding those that work for it—and instead care about their own gain. Those who trade focus more upon the movement of money—an ethereal thing—than on the goods that produce life. It habituates one to concentrating on the vaporous rather than on the gifts of creation that lead us to prayer and to virtuous living. Money is nothing other than a medium of exchange; according to the scholastics, it is not to be used as a store of value nor even a unit of account, as the use of money should, at its best, be used as an item for barter rather than a universal measure of value. Therefore, to make money an end rather than a medium, makes for an unnatural use of money—a use that does not propel us to holiness, which is our real natural end. As the first rule of money says: Money is only a placeholder, so always know what it is holding a place for. The stock market enchants us to forget about money as a placeholder, or even the companies and the people we are supporting, and leads us to think about amassment instead.

So to the Redditers, what do I say? You’re hilarious, that was amazing, be careful, and find a different avenue to justly fight injustice.

Jacob Imam is the president of New Polity (newpolity.com), a DPhil candidate and prize scholar at the University of Oxford writing on theology and economics.

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7 People Replies to “Short Squeezes and The Ethics of Reddit”

  1. MMB

    I don’t think this article is accurately explaining how shorting works, which seems to be leading to rash conclusions about the immorality of shorting.

    You say that it is “wrong to sell what isn’t yours and potentially lose your friend’s thing. That is fraud. It is fraud in claiming possession over a thing you do not own by virtue of the fact that you sell it.”

    But in shorting you are not selling something that isn’t yours…

    In shorting, the stocks become yours temporarily. The first step in shorting is to borrow a stock from a broker, so the stocks are transferred to your name (i.e. they become yours temporarily), and you need to pay an interest rate for the fact that you are borrowing these stocks temporarily. You’re paying a cost for the fact that you’re borrowing, so I don’t see the immorality.

    To use your example of the bike, it would be the same thing as if the person who owned the bike told the investor: “I will lend you my bike but I want $10 per month until I have it back. And I want it back in x months.”

    What is the immorality in this? I don’t understand.

    You seem to have another point which is to be against any type of market speculation. But that’s a different discussion.

    1. If you have to return something eventually, then you do not actually own it. This seems to be an obvious point.
      Additionally, if you are paying interest on something, then it further demonstrates that you do not own something.

      Fair enough to say this is a quick judgement on fraud—that seems true, but the borrower is indeed… borrowing.

    2. Pawel

      The example of the king manipulating currency is misleading. When the king tells his buddies to buy gold currency before he debases it, that’s called insider trading – guaranteed profit. A short seller takes a risk and can lose his investment. If short sellers get too greedy, a short squeeze brings equilibrium back into the market.

      The author seems to think short sellers can get away with never returning that which they have borrowed. The people loaning the securities are not stupid and protect themselves accordingly – ever heard of a margin call?

      1. Alex Renn

        This is a misunderstanding of the argument; the parallel that made is the lack of value-add in both systems.

  2. R.A.A.

    So is it moral to own stocks at all? Index funds, ETFs? Cryptocurrency? Not for day-trading, but for long-term investment. My loose understanding of the ethics of investments is that you must be in a position to potentially gain or lose, not just to gain (as in usury, e.g. peer-to-peer lending).

    If I buy a stock and sell it 20 years later for a profit, is it true that I haven’t worked to improve that commodity (stock)? I had to work to earn the initial money that I invested.

    1. Alex Renn

      This is not the argument. There are two criteria for investment: (1) that there is risk; (2) that it is for the common good. This means you have to know the companies you’re trading. ETFs make it very difficult to know all the companies that you are supporting. Take Vanguard held multiple ETFs with pornography companies: PRVT; FFN; LNET. When you’re buying ETFs do you check?

      The last part sounds like sophistry. St. Thomas says you must, at the very least, pray for the company.


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