The true driving force behind the GameStop revolution

This movement is the culmination of almost five decades of market democratization initiated by none other than the late founder of the Vanguard Group, Jack Bogle.

Despite all the hyperventilation during this week’s financial revolution, however, investors should see it as the last phase of a long evolution – and it is unlikely to disturb the markets at large.

Still, this is a remarkable moment. It’s like a bunch of television junkies watching a Los Angeles Lakers basketball game on TV swallow their beer and nachos, invade the court – and try to block LeBron James’s pitches and mercilessly bury Anthony Davis.

Amateur investors have always had advantages over professionals: they can invest in the long term and ignore the short term, as they cannot be fired for poor performance and have no clients who give them money (or take it out) in the worst case. Time.

Now, however, amateur merchants they are also asserting their advantages. They can communicate instantly, join the thousands – millions, perhaps – and buy or sell without commission.

Thousands of members of WallStreetBets, a reddit.com online community forum, have spearheaded the swarm of amateur individual traders who buy stocks against which hedge funds and other institutional investors are betting.

Moving in sync and en masse, these traders can raise or lower stocks, even if each dealer commits only a few dollars. Professionals, on the other hand, are legally prohibited from colluding and incur much higher brokerage costs.

These new mobs of amateur traders look like swarms of animals that often crowd in the jungle. You may have seen videos of an immense school of fish flashing in unison across the sea or a murmur of starlings forming a vast swirling vortex in the sky.

These swarms change direction in quick, coordinated bursts to find prey and escape predators.

But it is simplistic to think of this commercial movement as a frontal attack on the Wall Street elite by Joe Schmo and Jane Doe.

The caricature of this new generation of fast trader is a 19 year old boy who lives in his mother’s basement. Locked up and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “stimuli”) burning his pocket, he enjoys trading stocks. He often buys and sells options, which can produce even bigger and faster gains.

There is some truth to this stereotype. WallStreetBets culture can be rude and crass, seeking short-term emotions without regard to risk. However, some of its leaders are highly sophisticated, and not everyone who accumulates shares this week belongs to WallStreetBets.

Sean Mattingly is a 35-year-old semiconductor engineer who lives in the Portland, Oregon area. He prefers a simple and diverse portfolio of low-cost index funds that he almost never trades.

On January 25, Mattingly was on Bogleheads.org, one of his favorite sites, which advocates long-term investment. There, Mr. Mattingly stumbled upon a reference to GameStop’s wild price movements.

Cautious as he is, Mr. Mattingly likes to reserve up to 5% of his portfolio for what he calls funny money. After visiting WallStreetBets, he thought, “Wow, this can be fun. I’ll take my chances and see what happens. “

He bought “less than 20” GameStop shares for about $ 110 on Jan. 26. Mattingly says it “was absolutely fun” to own GameStop, which reached $ 483 this week. But, he says, “It has also been a lot of fun to be – without waiting – part of what is becoming a movement.” (He says he sold the stock for $ 400 on the morning of January 29 and “it was great.”)

This movement is Mr. Bogle’s son-love-monster. It is the culmination of 45 years of relentless decline in investment costs that began when the late Vanguard founder launched the first index mutual fund in 1975. Equity funds used to carry commissions of up to 8% and annual expenses of up to 2%; you can now buy index funds with no commission and expenses below 0.05% per year.

Decades ago, small investors could pay up to 5% to trade a stock. A stockbroker was a 9 to 5 guy in a paneled office who stole his pocket in every deal. Nowadays, your broker is in your pocket, as the applications on your phone allow you to trade shares at zero commissions, whenever you want.

WallStreetBets is the final stage of this evolution. Thousands of people can accumulate small businesses in giant pools of capital and whip each other in a collective frenzy.

In what neuroscientists call “dynamic coupling”, the brain activations of different people doing the same task converge, firing in sync. In such situations, says Princeton University neuroscientist Uri Hasson, “I am shaping the way you behave and you are shaping the way I am behaving. And the coordinated behavior of many, many individuals can generate dynamics greater than anything they could produce separately. “

This can also increase emotions. Although short hedge funds are relatively small in the financial ecosystem and their managers are more often rebellious than members of the system, flash mobs sometimes portray them as Goliaths.

And when, on January 28, major online brokers restricted purchase orders for some of this month’s top-rated stocks, thousands of small traders simultaneously accessed social media to express indignation, demand reparation and urge each other to “KEEP THE LINE, ”By not selling your shares.

While David’s narrative against Goliath has always been exaggerated, populist anger at brokerage firms for restricting trade is real – and it was immediately reflected in Washington, where several members of Congress called for investigations on the subject.

This market moment, with its rise in technology-driven social speculation, is an echo of 1999 and early 2000, when television ads for brokers celebrated mothers’ day-trading in their pajamas and claimed that tow trucks could buy tropical islands.

It is also reminiscent of 1901, when investors with wide access to the telegraph and telephone bubbled with enthusiasm throughout the new century. The total volume of business on the New York Stock Exchange doubled in relation to the previous year, to an unprecedented value of 209 million shares. On April 24 of that year, two-thirds of the entire Union Pacific Body

outstanding shares have changed hands. Across the NYSE, the annual turnover, a measure of how fast stocks are traded, reached 319%, a record that would not be broken for approximately another century.

In thousands of so-called bucketshops, individuals bet whether stock prices would rise or fall without having to buy any. Accepting directional bets as small as $ 5 or $ 10, well below the minimum required by legitimate companies, bucketshops exploded – although they were illegal in many states.

“The desire to get rich without work prevailed among men of all ages,” wrote journalist and economist Horace White in 1909, “and it will continue without a doubt as long as human nature remains unchanged.”

This takes us back to today’s flash-mob marketers. Aside from the few stocks that are your favorite toys, how did they affect the stock market as a whole?

In the SPDR S&P Retail exchange fund, which seeks to have approximately equal amounts of its approximately 100 holdings, GameStop reached 19.9% ​​of total assets on January 27. But these small, specialized funds are just droplets in the ocean of about $ 42 trillion from the U.S. stock market.

As of December 31, heavily sold shares like AMC Entertainment Holdings Inc.,

Blackberry Ltd.

, I steal Corp.

, and others recently favored by the flash mob accounted for just 0.13% of the S&P 500 and only 4% to 5% of the major small stock indices, according to Matarin Capital Management, a New York investment firm.

On January 27, the best-selling shares still accounted for just 0.17% of the S&P 500. They nearly doubled to 8.6% for the S&P 600 Small-Cap index and 11% for the Russell Microcap index. But well-diversified investors are unlikely to have a big impact.

The volatility of the S&P 500 so far in 2021 has risen slightly, but it still ranks almost exactly in the middle of its levels recorded since 1928, according to Distillate Capital Partners LLC., A Chicago-based investment company. Even the S&P 600 small stock index, which includes GameStop and several other flash mob favorites, fluctuated about a third less sharply in 2021 than its long-term average.

Taken together, these indicators suggest that flash mobs have had no significant effect outside the two or three dozen stocks they most enjoy trading.

The momentary failure in computer trading that triggered the May 6, 2010 “flash crash” was distressing for anyone who traded within a narrow time window, but left long-term investors unharmed. Likewise, this latest turnaround is likely to have a greater impact on investors’ attention than on their portfolios.

Financial flash mobs can be a symbol or symptom of the populist rupture that has swept the world in recent years. They are probably not the cause of this.

Write to Jason Zweig at [email protected]