The real driving force behind the GameStop revolution

This move is the culmination of nearly five decades of market democratization triggered by none other than the late Vanguard Group founder 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 unlikely to disrupt markets in general.

However, this is a remarkable moment. It’s like a bunch of potatoes on the couch watching a Los Angeles Lakers basketball game on TV shut down their beer and nachos, threw on the field – and proceeded to block LeBron James’ shots and dive without pity Anthony Davis.

Amateur investors have always had advantages over professionals: they can invest in the long run and ignore in the short term because they cannot be fired for poor performance and have no clients to give them money (or take them) in the worst case time.

But now, amateur traders it also asserts its advantages. They can communicate instantly, join thousands – millions, maybe – and buy or sell without commission.

Thousands of members of WallStreetBets, a reddit.com online community forum, have led the swarm of amateur individual traders who buy shares that hedge funds and other institutional investors have bet on.

Moving synchronously and en masse, these traders can drive an action up or down, even if each trader commits only a few dollars. Professionals, on the other hand, are legally restricted from collaborating and incur much higher brokerage costs.

These new crowds of amateur traders resemble swarms of animals that often unite in the wild. You may have seen videos of a huge school of fish shining in unison across the sea or a murmur of stars forming a vast swirling sky.

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

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

The caricature of this new breed of fast-moving trader is a 19-year-old man living in his mother’s basement. Closed and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “stimmies”) burning a hole in his pocket, he receives his blows by trading shares. He often buys and sells options, which can produce even bigger and faster gains.

There is a truth in this stereotype. The WallStreetBets culture can be rude and rude, looking for short-term emotions without risk. However, some of its leaders are extremely sophisticated and not everyone who accumulates in stocks this week belongs to WallStreetBets.

Sean Mattingly is a 35-year-old semiconductor engineer in Portland, Oregon. He is in favor of a simple and diversified portfolio of low-cost index funds that he almost never trades.

On January 25, Mr. Mattingly was on Bogleheads.org, one of his favorite sites that supports long-term investment. There, Mr. Mattingly came across a reference to the wild movements of GameStop prices.

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

He bought “less than 20” shares of GameStop for about $ 110 on January 26th. Mr Mattingly says it was “absolutely fun” to own GameStop, which went up to $ 483 this week. But, he says, “it was also a lot of fun to be – without expecting – part of what becomes a move.” (He says he sold $ 400 a share on the morning of Jan. 29 and “It felt great”).

This move is the child of Mr. Bogle’s monster love. It is the culmination of 45 years of relentless decline in investment costs, which began when the late Vanguard founder launched the first index mutual fund in 1975. Equity funds used to carry commissions of up to 8% and annual expenses of up to at 2% ; now you can buy funds indexed at zero commission and with expenses below 0.05% annually.

A few decades ago, small investors could pay up to 5% to trade a share. A stockbroker was a 9 to 5 guy in a billboard office who took your pocket for every transaction. Nowadays, your stockbroker is in your pocket because the applications on your phone allow you to trade shares at zero commissions, whenever you want.

WallStreetBets is the last stage of this evolution. Thousands of people can gather small trades in huge pools of capital and whip each other in a collective frenzy.

In what neurologists call “dynamic coupling,” the brain activations of different people doing the same task converge, triggering synchronized. In such situations, says neurologist Uri Hasson, a neurologist at Princeton University, “I shape the way you behave and you shape the way I behave. And coordinated behavior between many, many individuals can generate greater dynamics than anything they could produce separately. ”

This can also cause emotions to rise. Although short-selling hedge funds are quite small in the financial ecosystem, and their managers are more often mavericks than members of the unit, flash mobs have sometimes described them as Goliaths.

And when, on January 28, major online brokerage firms restricted buy orders for some of the strongest stocks this month, thousands of small traders simultaneously accessed social media for express indignation, ask for reparation and urge each other to “HOLD THE LINE, ”By not selling their shares.

While the David-versus-Goliath narrative has always been exaggerated, the populist anger against brokerage firms for restricting trading is real – and was immediately reflected in Washington, where several members of Congress requested investigations in this regard.

This market moment, with the rise of social speculation fueled by technology, is an echo of 1999 and early 2000, when TV commercials for brokerage firms celebrated the daily trading of mothers in pajamas and argued that trailer drivers can afford to buy tropical islands.

It also recalls 1901, when investors with wide access to the telegraph and telephone struck enthusiastically in the new century. The total trading volume on the New York Stock Exchange doubled compared to the previous year to 209 million unheard of shares. On April 24 of that year, two-thirds of the entire Union Pacific Body

the outstanding shares have changed hands. Across the NYSE, annual turnover, a measure of the speed of stock trading, reached 319%, a record that would not have been surpassed for another century.

At thousands of so-called bucketshops, individuals have bet on whether stock prices will rise or fall without the need to buy shares. Taking directional bets of up to $ 5 or $ 10, well below the minimum then required by legitimate companies, bucket stores have grown – even though they were illegal in many states.

“The desire to get rich without work prevailed among men of all ages,” wrote journalist and economist Horace White in 1909, “and will no doubt continue as long as human nature remains unchanged.”

That brings us back to today’s flash mobs. Beyond the few stocks that are their favorite toys, how did they affect the stock market as a whole?

At the SPDR S&P Retail fund traded on the stock exchange, which is trying to hold approximately equal amounts out of the approximately 100 holdings, GameStop reached 19.9% ​​of the total assets on January 27th. But such small and specialized funds are just drops in the ocean of about $ 42 trillion of the US stock market.

As of December 31, stocks have been very short-circuited, such as AMC Entertainment Holdings Inc.,

Blackberries Ltd.

, iRobot Body.

, and others recently favored flash mobs accounted for only 0.13% of the S&P 500 and only 4% to 5% of the major small stock indices, according to Matarin Capital Management, a New York-based investment firm.

As of January 27, the shortest shares still accounted for just 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 investors who are well diversified are not likely to feel a major impact.

Volatility for the S&P 500 so far has risen slightly, but is almost exactly in the middle of its levels since 1928, according to Distillate Capital Partners LLC., A Chicago-based investment firm. Even the S&P 600 small stock index, which includes GameStop and a few other flash-mob favorites, has fluctuated about a third less in 2021 than its long-term average.

Taken together, these indicators suggest that flash mobs did not have significant effects other than the two or three dozen shares they like to trade the most.

The momentary issue of computer trading that triggered the “rapid collapse” of May 6, 2010 was troubling to anyone who traded in a narrow time frame, but left investors unharmed in the long run. Similarly, this latest uprising is likely to have a greater impact on investors’ attention than on their portfolios.

Financial flash mobs can be a symbol or a symptom of the populist upheaval that has swept the world in recent years. These are unlikely to be the cause.

Write to Jason Zweig to [email protected]