The wild trade saga surrounding GameStop Corp. and other equity stocks targeted by groups of individual investors, apparently aimed at proving a point rather than making a profit, could indicate a significant change in the way parts of the market operate – or, more precisely, do not function, a veteran market analyst warned.
“I am concerned that this could create the academics who call ‘noise trader risk’ in which rational traders leave asset classes dominated by irrational traders because the risk is too high,” said Owen Lamont, co-director of multi-asset research for Wellington Management’s Quantitative Investment Group, in an interview published in Goldman Sachs’ ‘Top of Mind’ newsletter on Friday.
“As a result, volatility would have volatility in certain markets, leading to poorly priced assets,” he said.
‘Noise trader’ is the polite academic term for market participants whose trading decisions are volatile. But the concept may gain further significance after investors organized by Reddit’s WallStreetBets forum saw an increase in GameStop GME shares,
last month. The action, fueled by individual investors to punish short sellers who drove a short stake in the stock to 140%, caused the shares to rise.
Some short sellers got painful hits and the resulting “pressure” sent ripples through the stock market as hedge funds moved to reduce leverage. But other hedge funds made a kill and joined higher. And some individual investors who joined the party late suffered heavy losses when shares fell back to earth.
GameStop, which ended near $ 18 a share last year, rose to $ 483 at the end of January before falling back and trading below $ 40 a share last week. GameStop and other popular stocks targeting Redditt jumped up again this week. GameStop traded awkwardly on Friday, ending with a 6.4% loss to $ 101.74, but up more than 150% for the week.
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The phenomenon has increasingly investigated a range of practices, including short selling; the gamification of online trading; array procedures; and payment flow order, in which marketers pay brokers to place orders with them, a practice that has contributed to increasing a zero money trade.
It also spurred on the role of individual investors who have shown renewed interest in the market. “Noise traders” aside, many analysts view this new group of market participants as smarter than previous generations, with less tendency to chase returns.
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Lamont said it was unclear whether the trade attacks organized via social media would be a lasting phenomenon.
“The internet has enabled decentralized groups of activists to coordinate their actions in both politics and finance, and it’s hard to say whether social media trading will be a fad like hula hoops or is here to stay, “Lamont said. For the moment, liquidity and volatility in the financial markets appear to have declined.
Either way, prices are looking less and less like the outcome of an orderly process, Lamont said.
“The more traders are motivated by something other than profit, such as excitement, group loyalty or an anti-establishment sentiment, the more likely it is to occur,” Lamont said. “I see a good chance of disruptive disruptions, especially in illiquid names or in obscure corners of the market, as well as broader market crashes as we saw in 2010.”