What to make of the subreddit WallStreetBets? Surely this is capitalism in full flow, with all its positives and negatives? Tinker with its functioning at your peril, says the free marketeer.
There might have been grudging acceptance of bans on the short selling of financial stocks in the meltdown of 2008, but it is harder to see restrictions on buying the likes of GameStop in the same light.
First, dismiss the tempting notion that this is David versus Goliath. Democratization born of technology has changed the nature of markets, which until remarkably recently have remained the preserve of the few.
David, however, is the small saver that piles into the mob – only to be left high and dry when its instigators move on.
The facilitators of this dynamic are platforms
David is the investor in a pension fund, whose yield is trashed as the hedge funds liquidate the long positions that they held, and which are rather less talked about than their shorts.
The facilitators of this dynamic are platforms. The mob that invaded the US Capitol on January 6 organised itself in online venues such as Telegram.
Just as lawmakers are grappling with the question of whether or not social media platforms are neutral venues with no responsibility for content they help disseminate, so commission-free trading platforms will face their own crisis of identity as they wake up to the financial and regulatory risks of the democratization they have unleashed.
This comes after a long period of the rise in passive investment. When markets have become so passive, the impact of the marginal buyer or seller is greatly accentuated. This magnifies the importance of the GameStop-style squeeze
Next target
As Euromoney went to press, the mob had already moved on to silver – somewhat bizarrely, it might seem, given that that market is net long.
Compared with the stocks of GameStop and its ilk, silver is big and robust. But rarer metals are not, and neither are the exchange-traded funds that might emerge as the next big target here.
It will not take much to dislocate some of them, given the huge discrepancies that can exist between the liquidity of the traded securities and the commodities that underlie them. A monstrous gapping out between the physical and the virtual could prove ugly.
Combining as it has the power of social media networks to spread strategies instantly and the ability of a horde of new market entrants to trade at low cost from their smartphones, the GameStop episode may challenge the long-accepted primary role of securities and capital markets.
If these become mostly outlets for speculative expressions by the mob, can they simultaneously fulfil the function of bringing capital to the businesses that need it?
Regulators may wish they were considering the rights and wrongs of discrete, isolated episodes, but what they and all market participants now face are much more existential questions.
What are capital markets for? And who gets to decide?
