It seems that overnight, Wall Street fell from the altar. With the joint efforts of millions of retail investors in the popular online community “Betting on Wall Street (WBS”), the share price of GameStop, a listed company in the United States soared, from less than $20 at the beginning of the year to a peak price of $483 on January 28.
The soaring stock price has caused heavy losses to short-selling hedge funds. According to foreign media reports, the book losses of shorting GME hedge funds so far have reached 19.75 billion US dollars, of which the main short Melvin Capital lost 53% in January and had to seek external emergency financing.
This New Year’s drama of “small shrimps vs. big whales” is not just a speculative bubble or nonsense prank, but a continuation of the “angry politics” of the United States in the financial world. It is also a new challenge to traditional finance launched by the rise of the Internet economy and the power under the pandemic.
I. Equatization of asset management industry
The asset management industry has always been regarded as a “game” for the elite. Huge funds, complex strategies, and profound models all build an invisible high wall to block the general public.
In particular, the rapid development of quantitative and high-frequency trading in the past decade has distorted investment into an “arms race” for competitive trading speed and computing power investment, and individual investors are increasingly in a weak position in the market.
However, the increasing popularity of the Internet has changed all this. With the increasing power of personal computers and smartphones and the sharp increase of Internet penetration, individual investors can easily, quickly and at low cost access various investment information and diversified investment services.
The pandemic, which has lasted for more than a year, has restricted traditional economic activities such as blockades and other measures, and has promoted home-based work, online investment and other behaviors. To meet this trend, securities brokers such as Robinhood started with zero intermediary fees and revolutionary easy-to-use interface, and shouted the slogan “Let the people trade freely” and became the first choice for a new generation of individual investors.
According to Bloomberg data, 25% of the trading volume in the U.S. stock market in 2020 came from retail investors. At the beginning of January this year, the volume of retail investors on brokers App such as Robinhood exceeded the trading volume of institutions on the New York Stock Exchange and Nasdaq for the first time since 2008, which means that retail power has at some times It can almost keep pace with the institution.
Low-cost trading is “affirmation” the previously closed and highly centralized asset management industry.
Suddenly, thousands of amateurs can organize to make their own market research and investment reports, and individual investors have begun to use more strategies that used by hedge funds. In this game post stock shorting incident, individual investors not only buy a large number of stocks to push up the stock price, but also buy a large number of call options.
As the stock price keeps rising, the market makers of the call need to buy more stocks at this time to hedge the short exposure generated by the option. When the amount of these hedging orders is large enough.
After buying a lot of bills into the market, the stock price rose, forming a positive feedback, which eventually produced the so-called “Gamma Squeeze” phenomenon. As a New York Times report states, the operating interface on smartphones makes it as simple to execute the “gamma squeeze” strategy as calling burritoes from Uber Eats, which represents an unprecedented transfer of power.
II. Communityization of financial investment
Information and communication technologies have changed rapidly in the past 20 years.
One of the important developments is the emergence of social networks. Because social networks make a living on people-to-people interaction and allow people to communicate with each other more freely, social networks are fundamentally reshaping human society on a global scale, especially helping once marginalized groups to create influential community organizations.
As we see: Teens on TikTok disrupt Trump’s campaign rally, and Twitch’s Twitch live platform “Terror King” hits Capitol.
Now, the influence of social networks has begun to spread to the field of financial investment, which has led to the communityization of financial investment.
From the short-selling event of the game post station, it can be seen that the communityization of financial investment has three distinct characteristics.
First, community participants have a high degree of homogeneity and high-frequency communication.
Most of the individual investors involved in the short-selling incident come from the popular section of Reddit website, Wall StreetBets (WSB), many of whom are young people in their twenties and thirties. They like to laugh at themselves for “mentally disabled” and “autistic people” and believe in YOLO masters.
You only live once – you only live once, so you have to do it with a big ticket.
Second, the collective action characteristics of group nature and consistency are strong.
Individual investors on WSB have developed into a large army of retail investors, specifically targeting small and medium-sized stocks with U.S. stocks with a price of less than $5 and shorting institutions naming and shorting at the same time, so that these usually silent stocks suddenly increased their trading volume greatly, monopolizing stock liquidity in a short period of time, forming a short-selling effect.
Third, the community size has an exponential expansion effect.
When a large number of people are idle at home due to the pandemic, the online post office was born like a “beam”, which attracted more and more retail investors’ attention.
The total number of WSB group members was only about 2.6 million on January 23, and by January 26, it had exceeded 6 million, attracting a steady stream of individual investors.
The phenomenon of community investment and the soaring stock price of game stations have raised concerns about market manipulation.
Michael Burry, the prototype of the film Big Short, recently slammed social forums for bidding up stock prices. He tweeted that what is happening now is crazy and dangerous and should attract legal and regulatory attention.
However, whether discussing stocks and encouraging others to participate in speculation on social media involves attempting to manipulate the market is a gray and very vague field.
Unless it can be proved that the “leading big brother” who stirred retail sentiment and encouraged everyone to buy knew that these statements were untrue at that time, thus misleading “rational” investors, which obviously posed a serious challenge to existing securities regulation. As Peter Tachman, a star trader on the New York Stock Exchange, said: “In this perfect storm, some rich and poor people make a lot of money, while others may lose money. But who are the bad guys?”
III. Noise of market pricing
In traditional financial theory, individual investors are more regarded as noise traders.
Economists Friedman and Farma once believed that noise traders get lower investment returns than arbitragers trading with, so the selection mechanism of economic benefits will gradually phase them out. However, in behavioral finance theory, if noise traders are too confident or optimistic, they will buy a large number of risky assets.
Due to factors such as the unpredictable changes in investor mentality and limited arbitrage under agency relations, the attraction of arbitrage such as short selling operations will be greatly reduced, and noise traders will buy. Selling will lead to a greater deviation between market prices and basic values.
Game Post is a game store company that is on the verge of losing money. It has only $4 in junk in 2020, and has to close nearly 200 offline stores in the United States and bear $5 billion in debt.
In just one month, such a company has jumped from a small junk stock to a medium-sized and large stock with a market value of $230 billion, and it has to say that it has a considerable stock price bubble. However, this is not the end of madness, but the beginning of madness. The new victory of retail investors is getting braver and braver.
Not only has AMC, BlackBerry and other severely short-selling small stocks rise sharply, but also recently shifted its target to other markets such as silver, causing the price of silver to soar to its highest level in eight years.
This situation is similar to the confrontation between ants and ants in the movie “Insect Agents”: ants should always remember to collect food for ants. Every year, the grasshopper flies to the storage area to eat food and then leaves.
If the ant doesn’t do this, the ant will tell them that they will be punished. Until one day, the ants suddenly realized that their number greatly exceeded that of ants.
As long as they were united, they could knock down the hoppers. Nowadays, in financial markets, institutions are also increasingly feeling the power of retail grouping.
After analyzing the data of Reddit stock bar and Robinhood, the quantitative team of Wolfe, a Wall Street research institute, told institutional customers that the army of retail investors is emerging with a destructive force, making shorting their favorite stocks a dangerous game for Wall Street institutions. Xiangli, a well-known short-selling agency, also issued a statement that it would no longer issue short-selling reports, but focus on the long-selling opportunities of individual investors.
Obviously, in the face of the turbulent torrent of retail investors, any short-maker or arbitrage must limit their investment desire to avoid unnecessary noise traders’ risk.
In more small and medium-sized stocks, the market may no longer pay attention to valuation, but more attention to the momentum trading opportunities seen from the Internet such as WSB, YouTubers, TikTok or Robinhood.
Market pricing will also be full of more noise. U.S. stocks are moving towards “stupid money”. The gold prospecting model marched, perhaps this is the end of the prosperous era under the flood of liquidity and the polarization of bubbles.
IV. Popularization of forced air-action
After the 2008 financial crisis and the outbreak of the novel coronavirus pandemic, the Federal Reserve launched an unprecedented quantitative easing monetary policy, injecting a natural amount of liquidity into the financial system.
While Silicon Valley and Wall Street are like fish in water, industrial workers in the Great Lakes region, retailers in Little Rock, and oil workers in the Midwest have failed to share the feast of financial wealth expansion, and the overall wealth inequality has once again been raised to an all-time high.
When inequality increases and the gap between rich and poor widens to polarization, it will become a breeding ground for various economic and social contradictions.
Ten years ago, angry people launched the Occupy Wall Street Movement to protest Wall Street’s power and money trading and social injustice.
Ten years later during the pandemic, the U.S. government sent residents Discovery King to ease the recession, but provided a number of retail investors with “bullets” to Wall Street, venting anger at Wall Street’s greedy nature.
An open letter from retail investors to short-selling institutions spread in the market shows that the central bank has printed money to rescue the market after the financial tsunami, exacerbating the public resentment caused by the gap between rich and poor.
To a large extent, retail investors’ resistance to Wall Street, like the occupation of Capitol Hill by Sichuan fans, is a manifestation of the current rise in American populism and anti-establishment social sentiment, and a spread of American “angry politics”.
So much so that hedge fund tycoon Dario compared the air-forced war to a “populist political uprising”, he pointed out that “the general anger of the people — even hatred, and the ideas of pulling people off the horse, are almost everywhere in today’s United States.”
The rise of online retail investors this time has also made intergenerational contradictions manifest on the economic level. The main group on the WSB is the so-called “millennials” (generally referring to the birth of 1982-2000), many of whom have experienced two crises: they were just working, they were hit by the 2008-2009 global financial tsunami, and now they have encountered this large recession, which has made them in society. Wealth distribution is increasingly marginalized.
Historically, the proportion of people under 40 who own family wealth has decreased significantly. In 1990, they owned 13% of stocks and 14% of household wealth, but now they only own 4% of stocks and 4.5% of household wealth. In the face of job loss, widening of the digital divide and interruption of class mobility, deep anxiety and disillusionment have also become the triggers of this short-forcement behavior.
To a large extent, this populist resistance is a kind of revenge nihilism.
With the large fluctuation of the game post office stock price, the original grouped retail investors will inevitably diverge and re-integrate, and sooner or later, the game post station stock price will return to its due level. But this wave of online investors will certainly set off a wide-scale review after the wave of online investors resipating against the old Wall Street system.
The U.S. House Financial Services Committee issued a statement on its official website saying that it would hold a hearing on February 18 on recent market fluctuations on the theme of “Is the game stopped? When short sellers, social media, retail investors collide with each other, who wins and loses”.