The real force driving the GameStop revolution

It was the week when a bunch of amateur traders made Wall Street’s prettiest look like idiots.

From January 25 to 29, an army of individuals sent shares in GameStop Corp.

GME 67.87%

500% higher, and many others also shot up. In three days, many of these stocks gained more than most in a decade. The hedge funds on the other side of this commitment have lost billions.

This movement is the culmination of nearly five decades of the democratization of markets placed by none other than the late founder of Vanguard Group, Jack Bogle.

However, despite all the hyperventilation over this week’s financial revolution, investors should consider it the latest phase in a long evolution – and unlikely to disrupt the overall market.

This is a remarkable moment, after all. It’s as if a bunch of bankers who watched a Los Angeles Lakers basketball game on TV, strapped on their beer and nachos, slammed on the court – and continued to block LeBron James’ shots and mercilessly press down on Anthony Davis .

Amateur investors have always had advantages over professionals: they can invest in the long run and ignore the short run, as they cannot be fired due to underperformance and do not have clients who give them the worst (or take it away). time.

Now however amateur traders also claims their benefits. They can communicate instantly, thousands, maybe millions, team up and buy or sell commission free.

Thousands of members of WallStreetBets, a forum at the online community reddit.com, have led to the swarm of amateur individual traders buying stocks against which hedge funds and other institutional investors bet.


It’s as if a bunch of rest potatoes who were watching a Lakers game on TV, entered the track and dipped on LeBron.

Such traders move to a great extent and can drive a stock up or down, even if each trader only commits a few dollars. Professionals, on the other hand, are legally limited to collusion and have much higher brokerage costs.

This new crowd of amateur traders looks like swarms of animals that often merge in nature. Maybe you saw videos of a huge school of fish flashing in harmony through the sea or a mumble of starlings forming a large vortex in the air.

These swarms move in fast, coordinated bars to find direction and evade predators.

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But it’s simple to think of this trade move as a frontal assault on Wall Street’s elite by Joe Schmo and Jane Doe.

The caricature of this new breed of fast-moving traders is a 19-year-old living in mom’s basement. He’s caught up and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “voices”) burning a hole in his pocket, and he gets his kicks as shares. He often buys and sells options, which can yield even bigger, faster profits.

There is some truth in the stereotype. The WallStreetBets culture can be rude and rude and seek short-term excitement without considering risk. Yet some of its leaders are very sophisticated, and not all of them should belong to WallStreetBets this week.

Sean Mattingly is a 35-year-old semiconductor engineer in the Portland, Ore., Area. He likes a simple, diversified portfolio of low-cost index funds that he almost never trades.

Mattingly was on Bogleheads.org on January 25, one of his favorite sites advocating long-term investing. There, Mattingly stumbled upon a reference to GameStop’s wild price movements.

Careful as he is, reserve mr. Mattingly likes up to 5% of his portfolio for what he calls funny money. After visiting WallStreetBets, he thought, ‘Wow, that might be nice. I will take the chance and see what happens. ”

On January 26, he bought “less than 20” shares of GameStop for $ 110. Mattingly says it was ‘absolutely fun’ to own GameStop, which rose to $ 483 this week. But, he says, “it was also very nice to be, without expecting, part of what’s becoming a movement.” (He says he sold at $ 400 a share on the morning of January 29 and it ‘felt good.’)

The movement is mr. Bogle’s monster love child. This is the culmination of 45 years of relentless decline in investment costs that began when the late founder of Vanguard launched the first index mutual fund in 1975. Inventory funds carried commissions of up to 8% and annual expenses up to 2%; now you can buy index funds at commission zero and annually with expenses below 0.05%.

Decades ago, small investors could pay as much as 5% to trade a stock. A stockbroker was a man of 9 to 5 in an office with a panel that picked your pocket at every trade. These days, your stockbroker is in your pocket, as apps on your phone allow you to trade stocks on zero commissions.

WallStreetBets is the ultimate stage of this evolution. Thousands of people can gather small businesses into huge pools of capital and whip each other into a collective frenzy.

Wall Street is in turmoil over GameStop shares this week, after members of the popular WallStreetBets forum from Reddit encouraged the bet on the video game retailer. WSJ explains how option trading drives the action and what is at stake.

In what neuroscientists call ‘dynamic coupling’, the brain activations of different people doing the same task and shooting converge. Uri Hasson, a neuroscientist at Princeton University, says in such situations: ‘I shape the way you act and you shape the way I act. And coordinated behavior in many, many individuals can generate dynamics that are greater than anything they can produce individually. ”

It can also cause emotions to run high. Although short-selling hedge funds are relatively small in the financial ecosystem and their managers are more often mavericks than members of the business, the flash mobs sometimes portrayed them as Goliaths.

And when leading online brokerage firms restricted buy orders for some of the hottest stocks this month on January 28, thousands of retailers simultaneously took to social media to express indignation, demand redress and admonish one another to “KEEP THE LINE, ”By not selling their shares.

While the David-versus-Goliath narrative has always overlapped, the populist rage against brokerage firms for restricting trade is a reality – and this was immediately reflected in Washington, where several members of Congress investigated the case.

This market moment, with its increase in technological social speculation, is an echo of 1999 and early 2000, when television commercials for brokerage firms celebrated mothers in their pajamas, claiming that trailer drivers could afford to buy tropical islands. .

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It is also reminiscent of 1901, when investors with wide access to the telegraph and telephone bubbled over the new century of enthusiasm. The total trading volume on the New York Stock Exchange has doubled from the previous year to an unprecedented 209 million shares. On April 24 that year, two-thirds of the entire Union Pacific Corp’s

outstanding shares changed hands. Across the NYSE, annual turnover, which is a measure of how fast stocks are trading, reached 319%, a record that will not be surpassed in another century.

At thousands of so-called bakeries, individuals have been debating whether stock prices would rise or fall without buying any shares. With a directional bet of as little as $ 5 or $ 10, well below the minimum required by legitimate businesses, the money shops were booming – even though it was illegal in many countries.

“The desire to become rich without labor prevailed among men of all ages,” wrote journalist and economist Horace White in 1909, “and will undoubtedly continue as long as human nature remains unchanged.”

This brings us back to today’s flash mob dealers. Aside from the few stocks that are their favorite toys, how has that affected the stock market as a whole?

At the SPDR S&P Retail Bursary Fund, which wants to own approximately equal amounts of its approximately 100 shares, GameStop reached 19.9% ​​of total assets on 27 January. But such small and specialized funds are only drops in the roughly $ 42 billion ocean. of the US stock market.

On December 31, major short-term stocks such as AMC Entertainment Holdings Inc.,

BlackBerry Ltd.

, iRobot Corp.

, and others recently favored by the flash mob, according to Matarin Capital Management, an investment firm in New York, made up only 0.13% of the S&P 500 and only 4% to 5% of the leading small-cap indices.

On January 27, the shares with the shortest short accounted for only 0.17% of the S&P 500. They have roughly doubled to 8.6% of the S&P 600 Small-Cap Index and 11% of the Russell Microcap Index. Investors who are well diversified are unlikely to have a major impact.

Volatility for the S&P 500 so far in 2021 is slightly higher, but is still almost exactly in the middle of its levels since 1928, according to Distillate Capital Partners LLC., An investment firm in Chicago. Even the S&P 600 small-cap index, which includes GameStop and several other flash mob favorites, fluctuated about one-third less sharply in 2021 than its long-term average.

Collectively, these indicators indicate that the flash mobs did not have significant effects beyond the two or three dozen stocks they most liked to trade.

The short-lived error in the computer trading that caused the “flash crash” of May 6, 2010, was upsetting to anyone who traded within a narrow time trading but left investors intact in the long run. Similarly, this latest revolution is likely to have a greater impact on investors’ attention than on their portfolios.

The financial flash mobs may be a symbol or a symptom of the populist disruption that has swept the world in recent years. That’s probably not the cause.

Write to Jason Zweig at [email protected]

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