Cardify’s CEO, Derrick Fung, provides insight into his study of the stock frenzy, explaining that 50% of GameStop investors were first-time traders.
The frenzy over GameStop’s stock may have subsided, but the overwhelming influence small investors have had in the saga is likely to remain.
Nobody expects another supernova like GameStop to happen again, where a group of investors with smaller resources helped to increase the shares of a struggling company by 1,000% in two weeks. But the tools they employed can be used over and over, if these smaller investors stay connected on social media forums and if regulators don’t change the rules to stop them.
These smaller players, called “retail investors” in the industry to differentiate them from hedge funds and other big companies, are using many of the same tactics as professionals, after all. And if retail investors continue to have more influence, the result is likely to be more pronounced swings for some stocks than would have otherwise occurred, if not at GameStop’s spectacular level.
GameStop’s wild ride is causing some professional investors to prepare for more market volatility and politicians in Washington asking who is hurting themselves. A House committee is calling several players from the GameStop saga to an audience on Thursday, entitled “Game Stopped? Who wins and loses when short sellers, social media and retail investors come into conflict. “
“I don’t think we’re going to see major reforms that prevent this,” said Tony Casey, a law professor at the University of Chicago, about the rise of social media-driven commerce. “All parts of it will still be here in a few years, and we will probably see versions of it.”
Proof A may have arrived even earlier than many expected. Last week, stocks of several marijuana growers exploded, with medical marijuana grower Tilray more than doubling in three days, just over half in the next two. Part of the increase was due to real news, including a Tilray agreement to distribute medical cannabis in the UK. But smaller investors also invested in the shares.
“It’s time to join the cannabis movement if you’re not,” posted a user on Reddit’s WallStreetBets forum, a center for smaller investors and perhaps the launch platform for the GameStop saga.
The cannabis trade, however, lacks a key element of the GameStop drama: it is definitely not about sending a message to hedge funds. It is more about the thrill of doing bold business that can explode in a good or bad way and the camaraderie of sharing the gains and losses with others on the internet.
In the long run, a Wall Street adage says that “the fundamentals” always win. This means that the price of a share ends up accommodating where it should, based in part on how much profit the company is producing. The recent fall back to earth for GameStop’s stock could be proof of that.
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What GameStop did, however, was to show how a group of smaller investors coming together can dramatically raise stocks in the short term. Many market watchers believe that hedge funds and other professionals also played a role in raising GameStop, but they were probably just accelerating the outbreak unleashed by retail investors.
The market had seen similar events before. Last summer, Wall Street was shocked when Hertz’s shares rose, although they were about to become canceled and worthless because the company was in bankruptcy.
The moves can be even more spectacular if a stock has strong bets built against it, bets that would profit if its share price dropped. This can trigger what is called a “short squeeze”, in which an increase in the price of a share pushes skeptical traders to give up their bets. To do this, they need to buy stocks, which pushes the price up further and creates a feedback loop. GameStop was an extreme example because some of its shares were short sold several times.
Now, smaller investors are the ones that could be doing the tightening. Collectively, they account for 20% of all turnover, said Pauline Bell, an analyst at CFRA Research. This increased from 10% to 15% during 2019 and most of 2020.
Giving these smaller investors even more weight is the communication they can make on social media. This is part of what makes the recent movement an evolution of the day-trading craze of the late 1990s.
At the time, it was legal for retail investors to raise tech stocks like JDS Uniphase, but while they had access to chat rooms on the Internet, they didn’t have a Reddit or other social media to quickly amplify their voices and convince others to join as well. . They also lacked the ability to trade stocks on their phones, sitting on a couch with little to do in the middle of a pandemic, all of which paid zero commissions.
“We believe that a structural change may be taking place and that retail investors are likely to continue to be bigger players in the US stock market in the future,” wrote Lori Calvasina, head of US stock strategy at RBC Capital Markets, in a report recent.
Consider Bartosz Skokuń, a 27-year-old computer programmer in Wroclaw, Poland. His investments were quite conservative until he bought GameStop shares a month ago, after a friend told him about it and about Reddit’s WallStreetBets.
He made a healthy profit on GameStop and hopes to stay connected with WallStreetBets, examining the many action ideas that users come up with in the forum to find opportunities they like. Some of the ideas about what is known as r / WSB are brilliant, he said, and others are “totally stupid”.
That’s the beauty of it, he said: “these people share their ideas and efforts for FREE because they can talk to other people, discuss it, learn in groups. If there is such a thing as r / wsb power – that’s it! ”The group has more than 9 million members, many sharing due diligence in their ideas.
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What could restrict the influence of smaller traders? A tougher regulatory hand in Washington, for example. Thursday’s hearing before the Chamber’s Financial Services Committee will have testimonials from hedge fund CEOs, the company behind the popular trading app Robinhood and Reddit. It will also include a prominent user on Reddit’s WallStreetBets who was one of the first to believe in GameStop stock.
Washington could choose the patronizing path and restrict trading to smaller investors, so they cannot raise the price of a stock so easily and burn later if it falls, said Casey of the University of Chicago. But it would irritate retail investors who want to trade with the same freedom as hedge funds do.
Politicians could target short sellers, “but Wall Street is not an impotent lobby either,” said Casey. The industry says short selling helps make markets more efficient.
Another obstacle may be the pain that some retail investors are feeling after buying GameStop for $ 450 and seeing it now close to $ 50. But even then, there is skepticism.
“I am hopeful that some of these speculators have learned their lesson,” said Rich Weiss, chief investment officer for multi-asset strategies at American Century Investments. “But it looks like this is a lesson that people need to be reminded of, indefinitely.”