Minneapolis Star Tribune
There’s a gold rush going on in the financial markets. It features everyday underdogs getting their due and bigwig “bad guys” recoiling from their comeuppance. It’s accompanied by online flame wars and some of the dumbest displays of dominance in the animal kingdom.
In short, it’s an American phenomenon. And it’s all fun and games until someone gets hurt. But it’s not new. And it’s not necessarily a problem.
At the center of things has been GameStop, a 25-year-old company with a washed-up retailing strategy. It sells video game equipment and titles at a time when that activity has moved online.
Accordingly, its share price was low, and many Wall Street traders were selling short, betting on lower yet. Though vilified, shorting is a valid activity that benefits the market. Differences in opinion are what makes a market.
But when the price of a heavily shorted stock rises instead, those traders tend to unwind their positions, creating a feedback loop known as a short squeeze. Opportunistic speculators then jump in, hoping to make a quick buck (or many) before the music stops. Speculation can be ugly and isn’t for everyone, but the presence of speculators helps keep markets liquid.
The final influence recently has been an influx of inexperienced investors, using small amounts of initial capital and leverage they may not understand, egged on by message boards and newer trading platforms that have been, well, gamified.
The result is a bubble of absurdity that will burst.
Regulators, under pressure to respond, are monitoring the situation with GameStop and similarly frenetic stocks, as well they should be. But finding prosecutable manipulation can be a needle-in-a-haystack search.
There’s concern that the activity will spill dangerously into the broad market, but so far existing patterns, though a bit raucous themselves, are holding.
Meanwhile, brokers have been raising the bar for participation and building outright barricades to trading the most volatile stocks, which will (and should) be temporary responses.
Ultimately, some of the new investors will be lucky enough to get rich quick and keep it. Others will lose it all. Most, though, will learn a thing or two from having seen a thing or two and will move on to strategies that are boring but stable.
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