In The Revolution That Didn’t Happen: GameStop, Reddit, and the Small Investor Scam, Spencer Jakabcurrent editor of the wall street journal and former stock analyst at Credit Suisse, describes the real winners and losers of the GameStop 2021 Short Press – who aren’t the winners and losers we’ve been led to believe they are. He tells us about the fascinating events leading up to the short squeeze and explains how financial and technological mechanisms such as Robinhood’s “free” trading app made it possible.
The financial media described it as a watershed moment when power was handed over to ordinary retail investors. Despite Wall Street’s publicity about the “democratization of finance,” Jakab argues that it is still Wall Street, not the everyday retail investor, who is the ultimate winner of the stock meme revolution.
The class of investors that became the primary target of intense scorn on WallStreetBets were short sellers, who may have taken a permanent hit. Since short cuts can now be made easier on social media, for portfolio managers and traders, going short has become much more risky. Short sellers now know that they can be “leaguered” by a motley crew of retail traders. This development will likely reduce short-term interest in the future. And because short positions play a critical role in maintaining price efficiency, a reduction in short interest will likely lead to more bubbles in the future – bubbles in which the most likely buyers will be ordinary retail investors. .
A mid-2020 estimate of the average length of time a stock is held, according to the author, has fallen to less than six months from eight years in the 1950s. Stocks now change hands about 17 times more often than in the 1950s. Although each individual transaction was less expensive due to the elimination of commissions and a narrowed spread between bid and ask price, the new generation of retail investors, including those who facilitated the short GameStop squeeze, will leave a lot of money on the table as part of their active trade. The combination of more mainstream retail investors in the market and their belief that they can outsmart the market will likely be a boon for Wall Street practitioners.
According to Jakab, the democratization of finance and the retail rebellion was an illusion that the financial media bought too easily. If you answer people’s propensity to gamble when they first have money and tell them that they can make 30-50 trades a day without commission, but you sell their order flow, you create an indirect way for Wall Street to make money. Investor advocates, such as the Consumer Federation of America, are pushing for rules to protect investors from such instinctual gambling and criticizing the free trade model.
Many of the new retail investors will learn their lessons by paying Wall Street tuition in the form of losses. One of the most pernicious effects of young retail investors losing a small amount of money is that they become discouraged from investing. A dollar lost early on can be more painful than a dollar lost in middle age due to compound interest. Stock market wealth is already very unevenly distributed by age, race and income.
In summary, the author notes that competition and technology have made Wall Street a friendlier and more profitable place for individuals, provided they are playing a game that is not too exciting. If commission-free trading had existed decades ago, Jakab estimates that Warren Buffett could have earned 150 to 200 times more than the overall market. Despite the stock market meme revolution, the new boss of finance still seems to be the same old boss, and Wall Street is still a place where investors are losing too much money when they think they can beat the house.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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