The wild saga of trading around GameStop Corp. and other meme actions targeted by flocks of individual investors ostensibly to prove a point, instead of making a profit, could signal a major shift in the way market shares work – or, more precisely, don’t work, warned a veteran market analyst .
“My concern is that this could create what academics call ‘noise trader risk’, in which rational traders move out of asset classes dominated by irrational traders because the risk is too high,” said Owen Lamont, associate director Wellington Management’s Quantitative Investment Group multi-stakeholder survey in an interview published in Goldman Sachs’ Top of Mind newsletter on Friday.
“As a result, volatility would generate volatility in certain markets, leading to highly underappreciated assets,” he said.
“Noise trader” is the educated academic term for market participants whose trading decisions tend to be erratic. But the concept may be taking on additional meaning after investors organized through Reddit’s WallStreetBets forum fueled an increase in the shares of video game retailer GameStop GME,
last month. The move, driven by individual investors to punish short sellers who had taken the short sale to 140% of the shares, fired the shares.
Some short sellers suffered painful blows and the resulting “tightening” caused waves in the stock market as hedge funds moved to decrease leverage. But other hedge funds have also been successful, entering the race even more. And some individual investors who joined the party late suffered sharp losses when the shares fell again.
GameStop, which ended last year at around $ 18 a share, rose to $ 483 at the end of January before falling, trading below $ 40 a share last week. GameStop and other popular actions targeting Redditt jumped again this week. GameStop had busy trading on Friday, but was on its way to a weekly gain of more than 150%, trading close to $ 103.
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The phenomenon has increased scrutiny for a number of practices, including short selling; the gamification of online commerce; settlement procedures; and payment by order flow, in which market makers pay brokers to direct orders to them, a practice that helped enable the momentum towards zero-rate trade.
It also generated discussions about the role of the individual investor, who has shown renewed interest in the market. “Noise traders” aside, many analysts see this new group of market participants as more experienced than previous generations, less likely to seek returns.
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Lamont said it is not clear whether commercial attacks organized through social media will be a lasting phenomenon.
“The internet has allowed decentralized bands of activists to coordinate their actions in both politics and finance, and it is difficult to say whether social media-induced commerce will end up being a fad like hula hoops or here to stay,” said Lamont. For now, the trend appears to have decreased liquidity and increased volatility in the financial markets, he said, noting that it is difficult to say whether the lack of liquidity is leading to greater volatility or vice versa.
Either way, prices look less and less like the result of an orderly process, Lamont said.
“The more traders are motivated by something other than profit, such as enthusiasm, loyalty to the group or an anti-establishment feeling, the more likely it is to happen,” said Lamont. “I see a good chance of continuous interruptions, especially in illiquid names or in obscure corners of the market, as well as wider market failures, such as the one we saw in 2010.”