Cast an eye in the general direction of the finance sector and you’ll see that the last couple of weeks have sent shock waves through Wall Street.
After shorting the stock of game retailer Gamestop, several hedge funds and their backers lost billions in January after amateur investors on the Reddit community r/wallstreetbets initiated a ‘short-squeeze’, buying up Gamestop shares and boosting their price.
This has naturally caused some consternation; beyond the massive losses of capital, the move has raised issues of ethicality and legality in the finance sector, with some players crying foul and the White House announcing it is ‘monitoring the situation’. The wider audience of onlookers, however, have about as much sympathy for the big losers in the Gamestop debacle as one might have for a dodgy landlord whose roof has just caved in.
But beyond the glee, the colossal losses and the wailing and gnashing of teeth, one has to wonder: is what occurred this month an anomaly, or are we witnessing a massive disruption of not just the hedge fund sector, but the wider financial industry as a whole?
A Twitterstorm Of Investors
One of the reasons that Wall Street was caught so completely off-guard by the Gamestop share price boost was due, not only to the speed at which it happened, but the channels through which the messages to invest spread.
Rather than tap up a brokerage firm or a financial expert or two, the investors on r/wallstreetbets used social media, which incidentally, wasn’t just limited to Reddit. The message spread through platforms like TikTok, YouTube, Twitter (thanks to a massive boost from Elon Musk) and the free investment app, RobinHood. Rather than following financial balance sheets or news tickers, this group of investors were responding to word of mouth through app pings.
It helps you imagine a Twitterstorm, except rather targeting a certain company or individual for a prolonged session, a group of folks instead targeted a stock and then mobilised the troops. According to Mark McAllister, Senior Partner at Holborn Assets in Cape Town, Wall Street is right to be duly worried about this month’s turn of events.
“As far as the hedge funds are concerned, the last thing they want is something like this gaining traction, because, considering the following that’s taken off on r/wallstreetbets, they [the Reddit community]just have to pick a stock,” he says. “Then they can easily get their army of followers behind them and really start to go to town on it.”
“I would expect some sort of regulatory push-back, because look, who funds the people in government? Without a doubt, the people who lobby for the financial sector have a huge sway in what goes on.”
The problem facing these lobbyists (and their clients), however, is the fact that that the amateur investors who inflated Gamestop’s share price haven’t actually done anything illegal (“in fact, they’ve done what hedge funds have been doing for donkey’s years,” says McAllister), so cracking down on them may prove problematic for lawmakers and the financial sector. McAllister says, however, that one avenue that may be open to legislative attack could be Reddit moderators or users who present themselves as certified authorities in the finance field.
“If you’re providing financial advice in regulated markets like the US, UK and South Africa, that’s what the finance sector may seize on,” he says. “They’ll say ‘you’re effectively providing investment advice in an open forum, and if that’s the case, you need to be licensed’. If there’s an angle anywhere, that’s one they’ll probably use to get these guys shut down.”
“That said, regulators do move relatively slowly so we’ll have to wait and see what the SEC (the US Securities & Exchange Commission) does in the interim.”
Will The Market Evolve?
Whether or not regulators are successful in their efforts — after all, if someone on a forum doesn’t represent themselves as a certified expert can they cite the US Constitution’s 1st Amendment to prevent being silenced? – McAllister sees the Reddit Gamestop coup as a possible sign of things to come.
Much as was the case with the news — which once relied on consumers buying a paper or flicking on a TV channel – finance could have the potential to become more decentralised.
“Bitcoin is a great example of this; what used to be a central ledger on an old-style bank is now in a decentralised public domain – admittedly it’s anonymous, but you’re trusting complete strangers with it,” McAllister says.
“Like we saw with news I think this could be a symptom of that or at least a sign that we’re moving in that direction. It does feel like we’re starting to see an evolution of how markets are working,” he says.
So how will the established financial sector respond to this proposed evolution? Will they pivot to adapt to this new style of amateur investment en masse? Or will they take their proverbial ball and go home?
“Do I see banks, investment firms – the likes of Wells Fargo – suddenly popping up with a Reddit approach to investing? No, I don’t! I don’t think they have it in them.” says Mcallister. “What I think you’ll see more likely is instruments that get adopted. The one to watch out for is cryptocurrency.”
“You take these investors on Reddit who are making a fair amount of money until it gets stopped for whatever reason; what are they going to put all that money where it can’t be unduly influenced by others? They’re going to start recommending cryptocurrency because it’s gone through several market adjustments so I think what you’ll see in due course is a flow from dollars to crypto.”
“In the past, the finance sector has referred to this sort of trading as ‘dumb money’ and it’s likely that the arrogance of Wall Street may be in its undoing,” he says. “These Reddit investors seem to know what they’re doing; to be a good trader traditionally, you have to buy into fear and sell into greed, but this difference in this is that if you have someone come along who can corral the masses and control the fear and control the greed, that’s something we haven’t see before.”