Social Networks Overshadow Wall Street’S Big Names

2021-02-06   |   by CusiGO

Everyone knows how it will end, but no one knows when. The failure of Gamestop this week is the end of a story called the epic battle between big investors and reddit foreros on the Robin Hood platform. For Melvin capital, which is betting on the decline in gametop’s share price, that means a 53% loss in January and an emergency multi billion dollar recapitalization. For small investors who have teamed up from reddit’s Wall Street bets forum to support the video game store, the results are not so consistent: the profit margins of those who bought and sold 27 consoles on January 5 were as high as 1900%, while those who reached the peak were different.

However, like all good stories, once the story is finished, the background theme implied by the plot still exists. In the foreros v. Wall Street story, the key question is whether we are witnessing the beginning of a revolution in which small investors will demand greater power through social media and the decline in brokerage commissions. If it’s Robin Hood, it doesn’t charge directly (the platform’s revenue comes from selling anonymous information of its users’ transactions to other brokers). Social media has shifted the world from politics, information and entertainment to politics, information and entertainment. Why can’t they change the financial sector?

The Pope cites Isabel figuerola Ferretti, a professor of financial management at Pontificia de quillas University, as saying that one of them, the Flores side, has every reason to want this revolution. In his view, this phenomenon exposed “a new, limited small investor energy, which has dragged down the dissatisfaction with economic institutions since the global financial crisis”.

Well, we need to ask whether it can copy the strategy of announcing investment decisions on Internet forums, hoping to be imitated. In the United States, the Securities Exchange Act of 1934 prohibited the use of mechanisms for manipulating stock prices, but according to a report in the financial times, a few cases in which the SEC sued a broker for manipulating stocks always involved deliberate deception.

In the case of WallStreet bets, some foremen have publicly called for maintaining different stock prices. Regulators may be more stringent (there have been rumors that the SEC may investigate), but future foremen may reduce the risk of legal consequences if they only say that they buy and sell stocks Because they believe in the future of the company, whether they really buy or sell when they say they want to buy or sell, and whether they are careful to make general appeals to raise or lower the price of value. As one legal expert quoted by a British newspaper said, “it’s not illegal to be too optimistic about your forecast.”

According to figuerra Ferretti, one way to avoid unreasonable fluctuations is to seek more accurate supervision to affect all investors by determining the highest and lowest targets of securities valuation without damaging the legitimate rights of small investors to participate in the market, Use what’s called the foundation in industry jargon. “The most complex thing is to determine what the basic balance sheet is, but there is a range of ratios based on earnings per share, profitability, dividends, inventory… In any case, we have to be clear about what the key to each asset class is,” he added.

The advantage of this approach is that it manages large and small funds equally, thus eliminating the possibility of greater resentment against funds. But it could also be the difficulty of such regulation, as the funds themselves will resist it. You can always argue that each side’s different view of asset fundamentals is what the stock market game allows, allowing some people to consider selling when others think it’s appropriate.

If the little guys keep their firepower, we have to see what the big guys are doing. In the case of Gamestop, the first predictable response is to join the shopping cart. When Melvin, maplelane, and other bets lost billions of dollars in a few days, Glenview, Falcon edge, and Hurd wisely joined the wave of Wall Street bets, falling before it burst.

But according to William Quinn, a professor at Queen’s University in Belfast, he is the co-author of “financial bubble boom and bust” (one of the best economic works of 2020 by the Financial Times), What happens may also have another consequence, that is, the fund will reduce the number of bets (also known as short positions) to avoid large-scale reactions from retail investors, as in January.

When investors realize that the market price of securities exceeds the value that the issuing company may produce and decide to benefit from it, they will make a bet. It is often used for companies with financial problems or outdated business models. The simplest way is to borrow ownership, pay interest on the loan, and promise to return ownership within a specified period of time. As the investor thinks that he will reduce the price, he sells the security in the market at the time of the loan and repurchases the security within the period specified in the transfer contract. If his prediction is correct and the price of the security falls sufficiently, The money used to buy and pay interest will be lower than the price of the sale.

Short funds look like bad guys in movies, because they are often bad guys. For example, when they end their doubts about a fragile but recoverable company or debt issuer, they accelerate a recession that could have been avoided. But in the case of Gamestop, its role is not so dubious, because in a world where video games are increasingly sold on the Internet, the company’s cement and brick stores seem to have little future.

Well done, bets play a vital health role in financial markets, that is, constantly hollowing out stocks and bonds whose prices exceed their expectations (for example, burning straw to avoid a bubble bursting). In Quinn’s words, “those who bet have negative and positive effects, in which he emphasizes that they are usually very good at detecting fraud like wirecard and preventing too many bubbles, As a result, fewer bets may also mean a greater likelihood of a new bubble. ”

In addition to gametop’s shares, in January last year, the leaders around reddit focused their optimism on the shares of AMC cinema and American Airlines. Taking advantage of the stock market boom, the two companies sold hundreds of millions of dollars worth of equity, ensuring more liquidity to improve debt ratios and future prospects, according to the Bloomberg News Agency. As Quinn said, not all bubbles are bad. “For example, the electric car bubble we are in today has a high valuation, which enables manufacturers to finance at a very low price, which is a good thing; what they do, as Amazon did in 2000, is to sell their own stocks, and they know that they are overvalued, Improve your balance sheet, get ready to ride out the storm, and continue to grow. ”

This phenomenon makes it possible for these stocks to rise rapidly in January, which has a wide range of answers and other technologies. The first is proposed by the British economist John Maynard Keynes nearly 100 years ago. At that time, he explained that the pricing of stocks has nothing to do with their actual ability to create value, but with the constant speculation of market participants on each other. This technique, known in English as short squeeze, can be very freely translated as squeezing those who hold short positions.

In the above example, the investor who has to repay the borrowed shares will be afraid. When he sees that the title should be deleted, he turns around and tries to upload with the encouragement of social network users, but his business has not changed substantially. Because the investor knows he has to return the stock, It will try to hold down the price (borrow more shares and sell them), or give up and join the buyer’s mania as soon as possible (leading to price rise), so as to minimize the loss caused by the difference between its selling price and its purchasing price. According to the definition, there is no upper limit on the possible loss. Who knows how much a stock can go up?

In the case of Gamestop, in addition to leverage, financial institutions sell the right to buy shares at a specific price to more complex hedgers (perhaps fewer hedgers). In order to meet their contractual obligations and deliver shares at an agreed price, these institutions have also been forced to join the snowball acquisition, which continues to push up share prices backed by a large number of small investors.

For matt Levinson, author of another book about financial bubbles, money for everything, this part of the story is the most worrying. This is not because the rise and fall of gametop, AMC, Nokia or BlackBerry stock prices may cause significant damage to the real economy, but because the whole story of leverage will lead to people’s understanding of the overall vulnerability of the financial system, which in turn will make the financial system wobble.

“Such a thing will happen, I can’t say this year, next year or later, but at some time, because it happened after the South China Sea Company bubble burst in 1720,” Levinson said. “When it happens, let’s look back, and we’ll find that it’s like this, it seems insignificant, but it makes people stand up and ask,” what’s going on? ” “, It is from the small investor revolution these days that some people see an obvious sign that the overheating of the market is due to the massive liquidity injected by the central bank to maintain the economy.