Stock market mania isn’t new or innovative but, nonetheless, the future of investing for both retail and institutional money is set for rapid change as more and more participants come online.
Weekly Leading Article
It’s a strange situation that unites Alexandria Ocasio-Cortez, Ted Cruz and Donald Trump Jnr. to a common cause.
Just one month in, irony looks set to be the best performing asset class in 2021, surpassing puppies' 500 per cent bull-run in 2020 when demand for pedigree pooches skyrocketed under lockdown.
Last week Robinhood, not exactly true to its folkloric namesake, shut off market access to retail investors in favour, according to six million Reddit users, of Wall Street's evil hedge funds.
What transpired? Was it collusion? What does it mean for the future of investing in the stock market? Was it all just a tad overblown?
No doubt, much of the activities on Wall Street last week, that saw an army of Reddit users push the price of a battered analogue business heavily shorted by professionals sky-high, were due to a combination of lockdown boredom, speculative greed and vitriolic desire to stick it to The Man. But, something more profound was at work too.
The power of the crowd, helped by lower barriers to entry to invest in the stock market and the giddying power of social media brought about a huge rise in the price of GameStop as well as a number of other stonks (stocks). It also pushed some formerly powerful hedge funds to hurry out of short positions in these companies and away with a bloody nose. It would be short-sighted to expect this to be the end of the story.
Robinhood, the biggest, most deep-pocketed and most well-known name in the digital wealth sub-sector of fintech, acted for unknown reasons when irritating its users, half of whom had piled into GameStop, but no doubt it did so because it had to.
The contagion was not just felt in the US. Freetrade in the UK, which provides a similar level of market access for UK-based investors had to put in a weekend of hard graft to work to off-set issues it had with providing US market access to its customers owing to its FX partner bank.
If there is a long term trend of greater and greater dominance of the retail investor in markets underway this is both a good thing in terms of fulfilling fintech’s promise to ‘democratise’ financial services but also carries the risk of uncharted ‘populism’ that might well end in Trumpian catastrophe, not least for those investors bidding up the share price of a failing company that will ultimately crash.
Principally this is the kind of un-checked animal spirits that encourages people to bet using money they can’t afford to lose. Decades of regulation have been driven by a belief in the need to protect the retail market and encourage sensible practices. But in the age of the Reddit forum, much of it clearly needs updating.
More retail investors could spell long-lasting positive change, however. Shareholders also hold sway over companies values, future direction and executive compensation via voting rights. Traditionally, fund managers have voted on behalf of their retail and institutional clients at company AGMs but if the last week has shown us anything, its that social media’s populist power can quickly galvanise behind a cause. This could lead to meaningful positive change in areas such as climate change and persecution of minorities but as the politics of the past five years or so have shown, populism can also lead to chaos.
The AltFi Leader is a new weekly view for 2021 from our editorial team. We’d love to hear your ideas, thoughts, feedback and constructive criticism. firstname.lastname@example.org