“GameStop Set and Match” the referee would say in a tennis match but we are not at Wimbledon and in recent weeks I have asked a question: why are financial markets becoming like the casino?
The GameStop story seems incredible but the reality of what happened last week is that it could happen again in the future, today I will talk about the situation that is radically changing the mechanics of the financial markets.
The story of GameStop I think you will have already read it on all the sites that talk about finance or economics where experts talk about the great war between retail vs institutional investors and for one of the few times in the financial markets have won small investors.
First of all, I would like to know what the SEC and the US Government are doing and how they are thinking of resolving a situation that can have dramatic implications for the stability of the financial markets. I always start from the causes, it is incredible to see the boom of retail traders operating in the markets. Why it may have been caused by coronavirus, lockdown, less money in household pockets and unemployment = trading, “easy” earnings, smart working, for those who don’t believe me look for the keyword trading on Google Trends starting in March 2020.
In 15 years I had never seen such strong growth, too many people think to solve their “problems” by staying behind a computer by “trading” a bit like the people who go to the casino with the hope of making jackpots or in any case guaranteeing an annuity.
To feed this virtual casino on the financial markets we find:
- Social network
- Influential people like Elon Musk
- Finance gurus selling miraculous “courses”
People are unfortunately emotionally involved and start operating without any knowledge of technical analysis, mathematics and I add physics applied to financial markets (high frequency trading to give an example), so we find “bettors” who with 2000/3000 dollars double their earnings or through absurd financial levers lose almost all the initial capital.
The watchword is to ride the “megatrend” because Elon Musk said it for example on Twitter or Reddit and so the followers all together do as a poker “all in” creating a scary vortex (+100%,+300%). Here the prospect risks changing for all financial advisors or assett managers because their clients seeing what happened with GameStop would surely have doubts they would have with the risk of divesting the savings.
Think a little bit about a person who has worked all his life and invests his savings, at the end of the year he calls his consultant who says or dear Mr Smith we have earned a 3%, but retail with only 5000$ have earned 100% with a considerably lower risk and perhaps in a few days. What would Mr Smith say to his financial advisor?
Another point is that until recently the people who wanted to invest bought a financial newspaper like the Wall Street Journal, today with social networks everything has changed because it is enough a Tweet by Elon Musk or an “influencer” to start a war like GameStop without doing any kind of technical analysis but with the “push” of why everyone does it and therefore I do it too to buy.
Social networks are places where millions of people meet and by joining forces they create a trend without there being any assumptions (GameStop or silver), last week an article pointed out that more than 20% of the market is made up of retail investors and believe me that it is an incredible number.
The last point of this post is that if this casino-style “game” were to continue in the future I believe that the way to invest for all large and small “professional” investors will have to change, the strategies , money management and the investment time horizon will have to be reviewed, sometimes I think of those who until recently made long-term investments, today how can you think of doing this type of work?
With Robinhood (which sells flows to high-frequency companies) and other platforms, the risk to long-term investors increases, personally I believe that operations are to be reduced to multiday or intraday to avoid cases like GameStop where we have seen squeezes and sudden growth in volatility.
We will see what happens in the future but one advice is to revolutionize the way we trade and occasionally monitor “hot stocks” on these social networking platforms to possibly ride the trend.