In retrospect, the Occupy Wall Street movement has missed a turn.
The protests in Lower Manhattan annoyed some of the visiting bankers. Tents clustered outside the London Stock Exchange prevented a quick trip to Starbucks. But the events of the past week show that the way to really upset financial elites is to do it from within.
For the rarefied community of hedge fund managers and professional investors, the problem, of course, is that the unwashed greats have jumped into the stock market. In size.
In 2020, the democratization of finance flourished. In theory, this should be the kind of thing the big money industry applauds. A lot of World Economic Forum session in Davos asked how to improve financial inclusion, to help the less fortunate through financial market grants.
But newcomers have bypassed much of the financial establishment, and especially the smartly dressed and highly skilled professionals who earn fees for packing products into funds. Instead, a price war reduced the cost of retailing to zero.
People were bored, stayed home with nothing to do, often with no work to do and little to spend their extra money on. Going on self-directed walks in the stock market was a reasonable way to spend the day. It’s a cold heart that regrets the success many of these enthusiasts enjoyed last year in a stock rally that baffled many market veterans.
Inevitably, however, there will be painful losses for some naïve investors as the bubble eventually deflates. It is a high risk game – many of those who are trapped will be the least able to afford it. But it’s not just a question of financial health. It has become a destabilizing force in global markets.
Three things brought us here. One is the intense and apparent fascination with certain individual stocks. A early sign of that came with the car rental company Hertz – its shares jumped 800 percent at one point last June after filing for Chapter 11 bankruptcy protection.
The second is that it is not only stock trading that has been brought to the masses; options trading has it too. A lot of small bets on the future direction of stocks now overwhelm a market that has long been reserved for professionals, increasing the impact of the market.
Third, and most disruptive of all: these bettors are organized, across various message boards, the main one being Reddit’s r / wallstreetbets. It has 3.1 million users – or, as they like to be called, “degenerates.”
The spectacular merger into shares of GameStop, a supplier of consoles and video games made of stone and mortar, is the most dramatic example, but certainly not the only one, of the power of this group to trigger action – often at levels that some professionals consider to be out of touch with reality. reality.
In a series of articles, the FT examines the exuberant start of 2021 in global financial markets
“The largest fund in the world right now is wallstreetbets in terms of the ability to move the markets,” said a baffled hedge fund manager. “They are very confident and they use leverage. They are the big cock swinging around the room. This is not the kind of democratization of finance that the finely crafted set of Davos discussed about room temperature soda water.
Professionals have been shaken by what some see as predatory behavior. They point out that if they coordinated on Bloomberg’s chat messages the same way amateurs gang up on certain stocks, they would face regulatory action. And professional short sellers know they now have targets on their backs.
“The latest result of the gamification of markets is the hunt for short sellers,” said Carson Block, one of the biggest names among them. “It’s not rocket science – cut your shorts massively or risk going bankrupt.”
Mr. Block is right to take the hastily assembled Reddit army seriously. It really hunts down the scalps of hedge funds. A video was posted on Reddit three months ago that supported Capital Melvin had “been too greedy” in his bet against GameStop and had explained how to fight back. In another video, dialogue superimposed on a spooky scene from the Joker portrayed an amateur trader declaring aggressive stock trading strategies what happens “when you go through an entire high generation during a never ending recession with an app that lets you gamble for a chance to never have to worry again of the rent ”.
Regulators will no doubt be looking into the whole matter soon. But the “degenerates” will continue to be a force. Buckle up, because it doesn’t look like a blip.