GameStop, Reddit and WallStreetBets are probably not words many would have uttered in one sentence a few weeks ago, let alone put on their 2021 bingo card. Yet, one week on, they dominate the financial headlines following one of the most dramatic weeks in US markets.
In short, a group of traders following an online chat forum called Wall Street Bets have been buying shares that the market sees as extremely challenged. The logic of the market has been upended. The price moves fomented by this group has seen companies viewed as bad bets by professionals become the top-performers on the market. That has opened a Pandora’s Box of chaos in multiple ways, pushing some hedge funds to the brink of bankruptcy.
There are plenty of excellent articles to bring you up to speed (FT, Bloomberg). Alternatively, rewatch The Big Short to get to grips with some of the terminology.
Reputationally, the financial system – and the institutions that underpin it – now face a major challenge.
Banks and the financial services sector as a whole had been well-placed to position itself as part of the solution to the current economic situation – extending loans to troubled businesses, supporting capital raises and rights issues, etc. Trust in financial services has been growing. The latest Edelman trust barometer suggests that, in 2020, trust in the sector reached its highest point since the financial crisis.
Now every business that touches the market risks being sucked into a David and Goliath row. Calling out what looks, on the face of it, very much like market manipulation can be conflated into a group of parties with vested interests protecting their turf.
Regulators, in particular, have a tricky job. Is this market abuse that needs to be shut down? Or is this what a free market should look like?
Market participants come up with all sorts of reasons as to why a stock should trade at a certain multiple of its projected earnings, cashflow or market opportunity. In reality, the price is the price; the balance of the tension between buying and selling demand. Price is always abstract and determined by an unruly collective.
Philosophically, this debate gets very tricky very quickly. The sole job of regulators is to make sure the market is fair.
Who is behind the Wall Street Bets forum? Is it, as some suspect, an anarchic group of anti-capitalists supported by malevolent foreign actors determined to stir up trouble? Is it just a group of video gamers who have worked out how to play the mechanics of the markets to their advantage and make a fast buck? Is it some combination of all of the above? Or none?
What happens if tens of thousands of retail investors lose money through these trades?
What about institutional money losing out? Does that not matter? Where do those funds get their money?
The answers to these questions – and the subsequent response from regulators and professional investors – will amount to a pivotal moment for the level of public trust in capital markets and the financial sector more generally.
Take a couple of minutes reading the r/wallstreetbets subreddit and you get a picture of what is seen as the problem (WARNING much of the content is NSFW). It is being played out as if this is a war to democratise finance, with a common theme in that the current system isn’t working. This isn’t an issue that has just reared its head but something that was borne out of the financial crisis and a perception that a lack of real action was taken against the perceived perpetrators.