The crowds have taken over the asylum! Not long after the Capitol Building attack, a different type of attack has taken place - one of moral superiority and rooted in anti-capitalism against the hedge fund industry.
Over the last few weeks, a Reddit group, wallstreetbets, which has 4.8million ordinary members, managed to successfully shift upwards by 1,700%, the share price of a Texas-based GameStop, a chain of computer gaming shops in potential decline.
It’s based on the short bet principle. Investors want the price to drop. So if it rises, the investors who bet against it rising have to buy them at a pre-agreed price to cut their losses.
In real terms, shares were at US$19 in early January but on January 27, stood at US$347. That’s crowd power.
Its victims included not just GameStop but also Blackberry and others.
The movement was reminiscent of the anti-establishment pop industry movement which knocked Simon Cowell’s X Factor star off the Christmas number one spot,
The infamous Occupy movement raged against the fat cats of Wall Street. This time, it was faster but less effective.
What makes so many ordinary investors take on a Goliath of Wall Street? They’re furious about what they see as rampant capitalism and untempered greed of the hedge fund industry.
They’re emboldened by making a statement against income inequality and a world where the rich dominate the poor. It’s no coincidence that economic recession and divergent economic polarity fuel this further.
Do they think they’re making a statement driven by a core ideology? Are they driven by the bandwagon effect? Do they want to be part of something bigger than themselves?
Collective action by populous groups enact copycat campaigns. Sometimes, these are successful at achieving a global spotlight on a given issue.
Implications of A Loose Machine
However, the problem is three fold. Firstly the speed at which these groups can be mobilised in social media ensures that trend this will not be the last. It’s social signal shows the damage and volatility that can be wreaked. Platforms like Robinhood have grown users from 500,000 since 2014 to 13million last year.
Secondly, the precedent is now well set for others to follow for any stock that people take a dislike to, regardless of whether its cause is legitimise or fuelled by fake news, malicious intent or ill-will.
Thirdly, whereas rebellion always feels good in the moment, especially if it’s collective power. But in aggregate, it’s unlikely to make wholesale change in the markets. Yes, some funds will get burned but there are buffers in place for many.
It will be interesting to see just how well this type of behaviour takes hold in 2021. Regulators may well need to act.
While sport for the observer, there are always losers, and ironically, that may well be ordinary investors whose hedge funds partly contribute to their pension funds and 401k plans.