Once upon a time short sellers were outsiders who energetically attacked old and strong Wall Street. They are now on the walls looking down, as armies of day traders use options to send the value of very short stocks like GameStop Corp.
GME 18.12%
growing up.
Professional investors are concerned: how can financial markets work when stock movements are so obviously disconnected from the fundamentals, interpreted by both parties as a video game?
These concerns are understandable but exaggerated. Here, a small international comparison is useful: unlike other major global equity markets, frantic individual investors are far from the point where they are really altering the real purpose of equity markets: helping companies raise capital.
Retailers are associated with market inefficiency, as they are considered to be more likely to operate with noise, accelerating ups and downs. Volatility is not good for companies that want a placid and reliable environment to raise capital. This is one of the reasons why special-purpose or SPAC acquisition vehicles increased in popularity last year, as both investors and issuers tried to avoid a hectic stock. market.
But there is a difference in degree internationally. According to a UBS investigation, retail order flows have reached 20% of the total US stock market, double what they were in 2010. OTC trading, which includes, among others, 48% of the total, compared to 2019 levels above 35%. That’s nothing, compared to more than 80 percent of Chinese retailers, according to recent research by U.S. and Chinese academics.
That’s why, even in the busiest days in the U.S., individual options traders can move individual stocks, or even a very short set of stocks, but they don’t have the same impact on the overall market. Compared to the period forecast for retail and the collapse of Chinese stocks in 2015, what is happening in US markets is marginal. Nor is there anything to indicate that day traders, even in coordination, can break the long-term and money-losing record of day traders as a whole.
And even in China, public equity markets with much more frequent growth and fainting have improved over the years. Gavekal Dragonomics ’Thomas Gatley research notes that public capital fundraising for high-tech strategic industries hit record levels last year and leaked into a capital investment boom by ‘these companies. Unlike in 2015, there was no market crash.
For hedge funds that have specific stocks, the possibility that traders on the day may interrupt this positioning to make their own gain is a type of live issue. If a rising stock has such a big effect on a short position that threatens your business, you are playing at the high stakes table and the risks are yours.
Massive intraday movements driven by individual traders are dramatic and can be extremely detrimental to those who also take great risks betting against them. But for the rest, they remain a side show and don’t really undermine the functioning of American capital markets.
Write to Mike Bird to [email protected]
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