The real force driving the GameStop revolution

This move is the culmination of nearly five decades of market democratization initiated by none other than the late founder of Vanguard Group, Jack Bogle.

Despite the hyperventilation of this week’s financial revolution, however, investors should view it as the last phase of a long evolution, and it is unlikely to upset markets in general.

Still, this is a remarkable moment. It’s as if a bunch of potatoes watching a Los Angeles Lakers basketball game on TV make their beer and nachos run, enter the court, and proceed to block LeBron James ’shots and mercilessly sink Anthony Davis.

Amateur investors have always had advantages over professionals: they can invest long-term and ignore the short-term, as they cannot be fired for low returns and have no clients to give them money (or take away) in the worst time. .

Now, however, amateur merchants they are also asserting their advantages. They can communicate instantly, group into thousands (millions, perhaps) and buy or sell without commissions.

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

If they move synchronously and massively, these traders can access one or more stocks even if each trader only commits a few dollars. Professionals, on the other hand, are legally restricted to collusion and incur much higher brokerage costs.

These new gangs of amateur traders resemble swarms of animals that often join nature. You may have seen videos of an immense colony of fish blinking in unison across the sea or a murmur of starlings forming a swirling vortex in the sky.

These swarms change direction in rapid, coordinated bursts to find prey and evade predators.

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

The caricature of this new breed of fast-moving merchant is a 19-year-old girl who lives in her mother’s basement. Blocked and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “stimuli”) that burn a hole in his pocket, he gets his shares by trading stocks. He often buys and sells options, which can produce even bigger and faster profits.

There is some truth in this stereotype. The WallStreetBets culture can be rude and crude, looking for short-term emotions regardless of risk. Still, some of its leaders are highly sophisticated and not all of those accumulating in stocks this week belong to WallStreetBets.

Sean Mattingly is a 35-year-old semiconductor engineer in the Portland, Oregon area. It favors a simple, diversified portfolio of low-cost index funds that you almost never trade.

On January 25, Mattingly was on Bogleheads.org, one of his favorite websites, which advocates for long-term investment. There, Mattingly stumbled upon a reference to GameStop’s wild price movements.

As prudent as it is, Mr. Mattingly likes to set up up to 5% of his portfolio for what he calls fun money. After visiting WallStreetBets, he thought, “Wow, it might be fun. I’m going to take a risk and see what happens. “

On Jan. 26, it bought “less than 20” GameStop shares for about $ 110. Mattingly says it “has been absolutely fun” to own GameStop, which hit $ 483 this week. But, according to him, “it has also been a lot of fun to be part, without waiting, of what is becoming a movement.” (He says it sold for $ 400 a share on the morning of Jan. 29 and “felt great”).

This move is the loving son of the Bogle monster. It is the culmination of 45 years of incessant decline in the cost of investment that began when the late founder of Vanguard launched the first index investment fund in 1975. Equity funds used to carry commissions of up to 8% and annual expenses of up to 2%. ; you can now buy index funds at zero commission and with expenses of less than 0.05% per annum.

Decades ago, small investors could pay up to 5% to trade a stock. A stockbroker was a 9-5 year old man in a paneled office who would pick up your pocket at all the shops. Your stock broker is currently in your pocket, as your phone apps allow you to change stocks to zero commissions, whenever you want.

WallStreetBets is the last stage of this evolution. Thousands of people can pile up small trades in capital giants and whip each other into a collective frenzy.

In what neuroscientists call “dynamic coupling,” the brain activations of different people doing the same task converge, firing synchronously. In these situations, says Princeton University neuroscientist Uri Hasson, “I am shaping your behavior and you are shaping my way of behaving. And coordinated behavior between many, many individuals can generate greater dynamics than anything they could produce separately. ”

This can also grow emotions. Although short sale hedge funds are quite small in the financial ecosystem and their managers are more often nonconformist than members of the establishment, flash mobs have sometimes portrayed them as Goliaths.

And when, on Jan. 28, major online brokerage firms restricted purchase orders for some of this month’s hottest stocks, thousands of small traders simultaneously switched to social media to express indignation, demand reparation and urge each other to “KEEP THE LINE“, By not selling his shares.

Although David’s narrative against Goliath was always overflowing, the populist anger against brokerage firms to restrict trade is real and was immediately reflected in Washington, where several members of Congress called for investigations into the matter.

This market moment, with the rise of technology-fueled social speculation, is an echo of 1999 and early 2000, when television commercials from brokerage firms celebrated mothers ’daily trade in pajamas and claimed that tow truck drivers could afford to buy tropical islands.

He also remembers 1901, when investors with widespread access to the telegraph and the telephone boiled with enthusiasm during the new century. The total trading volume on the New York Stock Exchange doubled compared to the previous year to reach 209 million unpublished shares. On April 24 of that year, two-thirds of the entire Pacific Union Corp.

the outstanding shares changed hands. Across the NYSE, annual turnover, a measure of how quickly stocks are quoted, reached 319%, a record that would not be surpassed for nearly another century.

In thousands of so-called bucket stores, people gambled on whether stock prices would rise or fall without having to buy any stock. Taking directional bets as small as $ 5 or $ 10, well below the minimum required by legitimate companies, bucketshops grew, even though they were illegal in many states.

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

This brings us back to today’s flash-mob marketers. Beyond the few stocks that are your favorite games, how have they affected the stock market as a whole?

In the publicly traded fund SPDR S&P Retail, which seeks to own approximately equal amounts of its approximately 100 holdings, GameStop reached 19.9% ​​of total assets on 27 January. But such small, specialized funds are just drops in the ocean of about $ 42 trillion. of the American stock market.

As of December 31, shares with a sharp deficit like AMC Entertainment Holdings Inc.,

BlackBerry Ltd.

, iRobot Corp.

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

On January 27, the shortest shares still accounted for only 0.17% of the S&P 500. They doubled to about 8.6% of the S&P 600 Small Cap Index and 11% of the Russell Microcap Index. . But well-diversified investors are unlikely to make a significant impact.

The volatility of the S&P 500 so far in 2021 has increased slightly, but remains at almost exactly half the levels recorded since 1928, according to Distillate Capital Partners LLC., A Chicago-based investment firm. Even the small stock S&P 600 index, which includes GameStop and several other flash-mob favorites, has fluctuated about a third less sharply in 2021 than its long-term average.

Taken together, these indicators suggest that flash mobs have not had significant effects outside of the two or three dozen stocks they most like to trade.

The momentary problem of computer trading that triggered the “instant shock” of May 6, 2010 was distressing for anyone trading in a narrow period of time but leaving investors long-term unscathed. Similarly, the latter disorder is likely to have a greater impact on investor attention than on their portfolios.

Financial flash mobs can be a symbol or a symptom of the populist disruption that has ravaged the world in recent years. They are probably not the cause.

Write to Jason Zweig to [email protected]