The wild trading saga surrounding GameStop Corp. and other stocks of memes targeted by bands of individual investors seemingly to prove a point, rather than to make a profit, could signal a major shift in the way market shares work – or, more precisely, do not work. warned a veteran market analyst.
“My concern is that this could create what academics have called ‘the risk of noise traders,’ in which rational traders leave asset classes dominated by irrational traders because the risk is too great,” said Owen Lamont, associate director of multi-set research for Quantitative Investment Group, Wellington Management, in an interview published Friday in Goldman Sachs’ “Top of Mind” newsletter.
“As a result, volatility would generate volatility in certain markets, which will lead to extremely low-priced assets,” he said.
“Noise trader” is the polite academic term for market participants whose trading decisions tend to be irregular. But the concept may gain even more significance after investors organized through Reddit’s WallStreetBets forum fueled an increase in the shares of GameStop GME game retailer,
last month. The measure, fueled by individual investors to punish defaulting sellers that led to 140% short-term interest on shares, increased shares.
Some missing sellers received painful blows, and the resulting “tightening” sent waves to the stock market as hedge funds moved to reduce leverage. But other hedge funds also committed a crime by joining the race above. And some individual investors who joined the party late suffered heavy losses when the shares fell to the ground.
GameStop, which closed at nearly $ 18 a share last year, rose to $ 483 at the end of January before returning, trading below $ 40 a share last week. GameStop and other popular actions targeted by Redditt jumped again this week. GameStop traded volatile on Friday, ending with a 6.4% loss to $ 101.74, but gaining over 150% per week.
Read: GameStop Round 2? The way an option buying frenzy offers another shake-up of meme stocks
The phenomenon has brought increased control to a range of practices, including short selling; gamification of online transactions; settlement procedures; and order flow payment, in which marketers pay brokers to direct orders to them, a practice that has helped push for zero-fee trading.
It also led to discussions on the role of individual investors, who have shown a renewed interest in the market. “Noise traders” aside, many analysts see this new cohort of market participants as more skilled than previous generations, with a lower tendency to track profitability.
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 pour $ 170 billion into shares, says Deutsche Bank
Lamont said it was unclear whether trading raids organized through social media would be a lasting phenomenon.
“The Internet has allowed decentralized activist troops to coordinate their actions in both politics and finance, and it is difficult to say whether social media-induced transactions will become a fad like hula hoops or are here to stay.” said Lamont. For now, the trend seems to be a drop in liquidity and increased volatility in financial markets, he said, noting that it is difficult to say whether the lack of liquidity leads to higher volatility or vice versa.
However, prices are less and less the result of an orderly process, Lamont said.
“The more motivated traders are than profit, such as enthusiasm, group loyalty or anti-establishment sentiment, the more likely this is to happen,” Lamont said. “I see a high chance of continuous disruptions, especially in illiquid names or in obscure corners of the market, as well as wider market accidents like the one we saw in 2010.”