Financial markets have been seeking, since Wednesday, to react to the activity of amateur investors who have soared the price of shares of companies like GameStop. Even politicians are getting involved. Could what seems to have started as a big internet joke turn into a deeper crisis?
The “LOL” is no longer laughing. The crazy take on GameStop action, pushed by an army of Sunday investors, mostly active on the r / WallStreetBets forum of the very popular Reddit community site, has started to be taken very seriously over the past two days.
By the pros of finance, first, who pulled out the claws. Several apps and platforms allowing ordinary people to invest in the stock market – such as Robinhood, Webull or Interactive Brokers – decided, Thursday, January 28, to limit transactions on GameStop and other securities valued by members of r / WallStreetBets . They can hardly acquire new securities to avoid further increasing the price increase.
Restrictions that have stuck in the throats of apprentice stock marketers at Reddit and elsewhere. “When ordinary people try to make money in a system where, usually, it is only the rich who earn it, that’s what happens”, reacted Myron Sakkas, one of these keen on r / WallStreetBets interviewed by British channel BBC.
These investors were particularly upset with Robinhood, the most popular “free” brokerage app. The service which presents itself as a means of democratizing the Stock Exchange is accused of “treason” on Reddit and of “protect the rich” from small investors. They suspect, without having proof, that Robinhood has yielded to pressure from the major players in the market, who are also the main source of remuneration for the app, by cutting the tap on transactions on the most volatile securities.
It must be said that the feat of Reddit enthusiasts – to increase the action of GameStop by more than 1,200% since the beginning of January – has made several investment funds lose a lot of money. These short-term speculative pros have recorded up to $ 70 billion in losses because they had bet on the descent into the stock market hell of GameStop and other stocks – like BlackBerry, Nokia or even the chain of cinemas AMC – whose actions were on the contrary pushed towards summits by the amateur investors.
This is unacceptable.
We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
This stock market showdown also caught the attention of the American political community. Alexandria Ocasio-Cortez, the most media representative of the left wing of the Democratic Party, called Robinhood’s decision “unacceptable”. This has earned him unexpected support from Ted Cruz, the highly Republican pro-Trump senator from Texas. Sherrod Brown, the future chairman of the US Senate Banking Committee, has promised to organize “hearings on the current functioning of financial markets” in the USA.
A lot of noise for nothing ?
All this because a few tens of thousands of Internet users who, a little for the “LOL”, a little in ideological opposition to speculation and also out of greed, have beaten the pros of finance at their own game. the companies concerned are second-rate. Apple, Procter & Gamble and the other groups in the S & P500, the index of major stocks on Wall Street, are not at all affected. And the $ 70 billion in losses must also be put into perspective: “Of course, the figure is impressive in absolute terms, but it is an amount that the market can quite absorb”, specifies Alexandre Baradez, head of economic analyzes for the financial consultancy firm IG, contacted by France 24.
However, the financial analyst does not think that there is “much ado about nothing” around this matter. Because, in addition to the reactions of platforms like Robinhood, it could have other consequences on the financial sector, and in particular that of causing a risk of runaway. Indeed, to cover their losses, hedge funds must compensate by selling other securities. “Driven by fear, they could make trade-offs likely to destabilize the entire financial center,” explains Alexandre Baradez. Hence the interest in “calming volatility, because there is a real fear of the domino effect”, he continues.
From GameStop to the next financial crisis, would there be only one step? In fact, the r / WallStreetBet affair is not an epiphenomenon out of nowhere that suddenly threatens to turn everything upside down. This would be, according to Alexandre Baradez, the culmination of a stock market trend that began last year and has accelerated since the election of Joe Biden to the American presidency in November.
“Investors have developed a sort of sense of omnipotence, as there seems to be no more risk on the horizon with Fed money flowing freely and a Biden presidency appearing less chaotic than the Trump era. In this context, there is an appetite for risk taking that has developed, “explains Alexandre Baradez. Result: speculators who speculate all the time and individual investors convinced that they can win against these financial behemoths. “Crises often arise from situations where we think we are not risking anything”, summarizes this expert.
Third-party financial statement against stock market nobility?
The irruption of these Sunday investors on the stock market is also a new and unexpected phenomenon “to which the market and regulators have yet to adapt”, underlines Alexandre Baradez. Easier said than done. “We do not know how far this movement can go and what are its objectives”, he summarizes.
The posts on Reddit and the few interviews granted by some of these investors give the impression that “it is the expression of a deeper societal crisis, with individuals who have suffered the economic repercussions of the crisis who want to leave. take to the financial establishment symbolized by hedge funds, “notes the financial analyst. A kind of repetition at the time of Reddit of the will of a third financial state, which wants to abolish the privileges of the nobility of the Stock Exchange.
But others, as The Guardian points out, seem only driven by greed or the desire to have fun at the expense of the powerful. It is therefore difficult to know if this movement will run out of steam once the “LOL” effect has passed, or if it will become established over time. An unknown which also weighs on the behavior of investors who have a holy horror of uncertainty.
And if it turns out that this type of movement can deeply destabilize the market, how can we prevent excess? “It’s a real headache because we are not going to ban forums,” admits Alexandre Baradez. So there could be, after the Internet bubble crisis and the subprime crisis, that of Reddit. Every era has the crises it deserves.