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The wild trading saga surrounding GameStop Corp. and other actions even targeted by groups of individual investors supposedly proving a point, rather than making a profit, could signal a significant change in the way certain parts of the market operate – or , more specifically, does not work, warned a seasoned market analyst.
“I’m concerned that this could create what academics have called ‘noise trader risk’, in which rational traders move out of asset classes dominated by irrational traders because the risk is too high,” Owen said. Lamont, associate director of multi-asset research for Wellington Management’s Quantitative Investment Group, in an interview published Friday in Goldman Sachs’ Top of Mind newsletter.
“As a result, volatility would create volatility in some markets, leading to extremely poorly valued assets,” he said.
“Noise trader” is the polite academic term for market participants whose trading decisions tend to be erratic. But the concept may take on additional significance after investors organized through Reddit’s WallStreetBets forum fueled a rise in shares of video game retailer GameStop GME,
last month. The move, fueled by individual investors to punish short sellers who had pushed short interest in the stock to 140%, sent stocks skyrocketing.
Some short sellers took painful hits and the resulting “crunch” caused waves in the stock market as hedge funds moved to reduce their leverage. But other hedge funds have also taken a kill, joining the higher race. And some individual investors who joined the party late suffered big losses when stocks fell back to earth.
GameStop, which closed last year at almost $ 18 a share, climbed to $ 483 in late January before falling back, trading below $ 40 a share last week. GameStop and other popular actions targeted at Redditt surged again this week. GameStop saw choppy trading on Friday, ending in a 6.4% loss to $ 101.74, but gaining over 150% for the week.
Read: GameStop Round 2? How an option buying frenzy provides another shake to stocks meme
The phenomenon has brought closer scrutiny to a range of practices, including short selling; the gamification of online commerce; settlement procedures; and payment for order flow, in which market makers pay brokers to direct orders to them, a practice that has helped push towards no-fee trading.
It also sparked discussions about the role of individual investors, who have shown renewed interest in the market. Aside from the “noise merchants,” many analysts view this new cohort of market participants as smarter than previous generations, with less inclination to seek returns.
Read: Individual investors are back – here’s what it means for the stock market
Also see: New wave of intrepid retail investors may be ready to invest $ 170 billion in stocks, says Deutsche Bank
Lamont said it was not clear whether commercial raids organized via social media would be a lasting phenomenon.
“The internet has made it possible for decentralized activist groups to coordinate their actions both political and financial, and it’s hard to say if social media-induced commerce will end up being a fad like hoops or if it’s here. to stay, ”Lamont said. For now, the trend appears to have decreased liquidity and increased volatility in financial markets, he said, noting that it is difficult to say whether the lack of liquidity results in higher volatility or vice versa.
Either way, prices look less and less like the result of an orderly process, Lamont said.
“The more motivated traders are for something other than profit, like excitement, group loyalty or anti-establishment sentiment, the more likely this is to happen,” Lamont said. “I see a good chance of disruption, especially in illiquid names or in dark corners of the market, as well as larger market flash crashs like the one we saw in 2010.”
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