The wild trade saga surrounding GameStop Corp. and other meme actions led by gangs of individual investors apparently to prove a point, rather than making a profit, could signal a major shift in the way market shares work or, more accurately, do not work, warned a veteran market analyst.
“My concern is that this may create what academics have called‘ noise trader risk ’, in which rational traders exit asset classes dominated by irrational traders because the risk is too high,” Owen Lamont said. , associate director of multi-set research for Wellington Management’s Quantitative Investment Group, in an interview published Friday in Goldman Sachs ’‘ Top of Mind ’newsletter.
“As a result, volatility would generate volatility in certain markets, which would lead to incorrectly priced assets,” he said.
“Noise operator” is the educated academic term for market participants whose business decisions are often erratic. But the concept may be taking on additional meaning after investors organized through Reddit’s WallStreetBets forum were pushing a rebound in the shares of GameStop GME, a video game distributor.
last month. The measure, driven by individual investors to punish short-term sellers who had driven short interest in the shares to 140%, caused the shares to skyrocket.
Some short-term sellers had painful hits and the result of “compression” caused waves in the stock market as hedge funds moved to lower leverage. But other hedge funds also caused a death toll, adding to the higher march. And some individual investors who joined the party late suffered heavy losses when the shares returned to the ground.
GameStop, which ended last year at about $ 18 per share, rose to $ 483 in late January before falling back, and traded below $ 40 per share last week. GameStop and other popular actions aimed at Redditt jumped again this week. GameStop saw hectic trades on Friday, but made a weekly profit of more than 150%, trading at about $ 103.
Read: GameStop round 2? As an option buying frenzy it provides another shock to meme stocks
The phenomenon has led to greater control over several practices, including short-term sales; the gamification of online commerce; liquidation proceedings; and the payment of order flow, in which market makers pay brokers to direct orders to them, a practice that has helped allow for the push toward zero-share trading.
It has also sparked discussions about the role of individual investors, who have shown renewed interest in the market. Aside from the “noise traders,” many analysts believe this new cohort of market participants is smarter than past generations, with less propensity to pursue yields.
Read: Individual investors have returned: this is what it means for the stock market
See also: A new wave of fearless retail investors could be ready to invest $ 170 billion in shares, Deutsche Bank says
Lamont said it was unclear whether trade raids organized through social media will be a lasting phenomenon.
“The Internet has allowed decentralized groups of activists to coordinate their actions in both politics and finance, and it’s hard to say whether social media-induced commerce will end up being a fad like hula hoops or is it here to stay,” said Lamont. For now, it appears that the trend has decreased liquidity and increased volatility in financial markets, he said, noting that it is difficult to know whether the lack of liquidity leads to greater volatility or vice versa.
Either way, prices look less and less like the result of an orderly process, Lamont said.
“The more they motivate marketers for something other than profit, such as enthusiasm, group loyalty, or anti-establishment sentiment, the more likely it will occur,” Lamont said. “I see a good chance of interruptions, especially in illiquid names or obscure corners of the market, as well as wider market falls like the one we saw in 2010.”