Unless you’ve been living under a rock, there’s an epic battle in the world of finance going on in the US right now.
My colleague Ryan Clarkson-Ledward just wrote a great piece on the GameStop phenomenon, which you can read right here.
‘RCL’ — as he is affectionately known within the business — is humble, mild-mannered, and a highly astute stock picker who runs the Australian Small-Cap Investigator service.
But his most recent piece was too gentle in my view.
So today, I’m going to be a bit more forceful.
I want you to start by watching this video.
Here’s the main thing that NASDAQ CEO Adena Friedman said if you aren’t into video content:
‘I think that, in general, when we evaluate how we would manage through a situation where you see a significant run-up in a stock not based on news, not based on fundamentals — what we do is we do have technology that evaluates social media chatter. If we see a significant rise in the chatter on social media channels … we also match that up against unusual trading activity, [and] potentially halt that stock to allow ourselves to investigate the situation, to be able to engage with the company, and to give investors [read: the big short funds] a chance to recalibrate their positions.’
Quick, employ the AI text filter!
We must stop people making decisions to buy or sell equities and options on an open market.
Maybe people are manipulating the corn price with their hunger?
The hypocrisy is utterly palpable here.
And many major media outlets are eerily silent on the GameStop revolution.
This shows you just how much is at stake.
In a recent piece on crypto I referenced the following:
- Panama Papers
- HSBC cartel scandal
- In Australia, the fee for no service scandal
- Wells Fargo fake account scandal
- Relentless multiyear precious metals price fixing by Deutsche Bank and others
So, when regulators in the US come out and say that coordinated behaviour by retail investors is manipulation, remember the following…
Since the first stock markets began, everyone has tried to get a leg up on the competition.
It’s human nature.
Don’t even get me started on zero-commission trading fees that are subsidised by order flow data purchases to the highest bidder.
Fact is, the economies of scale afforded by the sheer size of hedge funds has been abused relentlessly.
‘RCL’ makes a good point about small-caps having at least a veneer of purity to them.
The big funds rarely dip their toes in the volatile small-cap waters, or at least, not to any sizeable degree.
And there are bad actors aplenty in this part of the market as well.
Bad people do bad things.
Maybe the deeper point for Australian investors from the GameStop revolution is this though…
Education is key
If you don’t actively set aside time to educate yourself about markets, you are doing yourself a disservice.
And the financial protest movement that the GameStop short squeeze set off is a sign of the times.
Many retail investors flooded into the market on lockdowns out of boredom.
Some turned out to be quite good at what they did.
They then became the envy of big funds caught off guard by more nimble investors.
Peter Costello who is chairman of the Future Fund recently had some comments profiled in the Australian Financial Review:
‘Day traders making “unbelievable returns on companies that don’t make profits” will face a reckoning as professional investors start to turn the screws on unprofitable technology companies that have enjoyed surging stock valuations.’
That was the lead sentence of the article.
This is what it’s devolved into — financial class warfare.
Supposedly wise professional investors with a penchant for value and big short bets on failing companies versus supposedly misguided and irrational retail investors.
Why are the economies of scale conjured by a Reddit forum any different, morally, to the economies of scale conjured by a hedge fund?
If the regulators decide to crack down on the GameStop revolution (in the US or here), they will prove once and for all that the emperor has limited to no clothes.
And if he does have clothes, it’s an expensive suit paid for by the big hedge funds that deserve a chance to ‘recalibrate’.
For Money Morning