This week, a bunch of amateur traders took the best pictures of Wall Street.
From January 25 to 29, a motley army of individuals sent actions in
rose 500% and caused many other stocks to skyrocket. Many of these stocks gained more in three days than most have in ten years. Hedge funds that were on the other side of those bets lost billions.
This movement is the culmination of nearly five decades of market democratization initiated by none other than the late Jack Bogle, founder of the Vanguard Group.
Despite all the hyperventilation over this week’s financial revolution, investors should see it as the latest stage in a long evolution – one that is unlikely to sway the markets as a whole.
It remains an extraordinary moment. It’s like a group of sofas watching a Los Angeles Lakers basketball game on television, grabbing their beer and nachos, running onto the court and mercilessly dunking LeBron James’ shots and Anthony Davis’ dunk.
Amateur investors have always had advantages over professionals: they can invest for the long term and ignore the short term because they cannot be fired for poor performance, and they do not have clients giving (or taking) them money at the worst possible time.
But today, amateur traders also demand benefits for themselves. You can communicate instantly, reach thousands or millions of people, buy or sell without commission.
Thousands of members of WallStreetBets, a forum of the online community reddit.com, lead a swarm of individual amateur traders who buy stocks that hedge funds and other institutional investors have bet against.
like a bunch of benchwarmers watching a Lakers game on TV and jumping up and down on the court and diving on LeBron.
By moving in sync and en masse, these traders can make the stock market go up and down, even though each trader earns only a few dollars. Professionals, on the other hand, are required by law to join forces and must pay much higher brokerage fees.
These new enthusiasts are like the herds of animals that often gather in the wild. You may have seen videos of giant lobsters flashing in unison in the sea, or the whispers of starlings forming a huge vortex in the air.
These swarms change direction in rapid, coordinated bouts to find prey and avoid predators.
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But it is too simplistic to see this trading movement as a frontal attack by Joe Schmo and Jane Doe on the Wall Street elite.
The caricature of this new breed of fast traders is the 19-year-old occupant of his mother’s basement. Locked in and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “Stimmies”) punching a hole in his pocket, he kicks into stock trading. He often buys and sells options, which can bring him even bigger and faster profits.
There is truth to that stereotype. The culture of WallStreetBets can be rough and crude, looking for short-term thrills without concern for risk. Nevertheless, some of their leaders are quite sophisticated, and not everyone who picks stocks this week belongs to WallStreetBets.
Sean Mattingly is a 35-year-old semiconductor engineer in Portland, Oregon. He prefers a simple, diversified portfolio of low-cost index funds, in which he almost never trades.
On January 25, Mr. Mattingly was at Bogleheads.org, one of his favorite sites that advocate long-term investing. There Mr. Mattingly came across a link to GameStop’s wild price movements.
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Jason Zweig writes about investment strategies and how to think about money.
Carefully, Mr. Mattingly keeps aside up to 5% of his portfolio for what he calls “fun money.” After visiting WallStreetBets, he thought, “Wow, this could be fun. I’m going to take a chance and see what happens”.
On January 26, he bought “less than 20” GameStop shares for about $110. Mr. Mattingly says it has been “absolutely fun” to own GameStop, which reached $483 this week. But, he says, “it’s also been a lot of fun – without expecting it to be a move. (He says he sold the game on the morning of January 29 for $400 a share, and that was “great.”)
This move is Mr. Bogle’s monstrous love story. It is the culmination of 45 years of relentless investment to lower costs, which began when Vanguard’s founder launched the first index fund in 1975. Stock funds used to cost as much as 8% and annual fees as much as 2%; today you can buy index funds with no fees and annual fees of less than 0.05%.
A few decades ago, small investors could pay up to 5% to trade stocks. A broker was a 9-to-5 guy in a panel office who dipped into his pocket on every trade. Today, you have your stockbroker in your pocket because applications on your phone allow you to trade stocks without commission, whenever you want.
WallStreetBets is the latest step in this evolution. Thousands of people can aggregate small trades into huge pools of capital and challenge each other in a collective frenzy.
The GameStop stock scandal began this week on Wall Street after members of the popular Reddit WallStreetBets forum bet on the video game retailer. The WSJ explains how options trading is driving this development and what is at stake.
In what neuroscientists call “dynamic connectivity,” the brain activations of different people performing the same task come together and are activated at the same time. In such situations, says Uri Hasson, a neuroscientist at Princeton University, “I shape your behavior and you shape mine. And the coordinated behavior of many, many people can create a greater dynamic than what they could create individually.
It can also evoke strong emotions. Although short selling hedge funds play a relatively small role in the financial ecosystem and their managers are outsiders rather than members of the establishment, they are sometimes portrayed by flash mobs as Goliaths.
And when large online brokerage firms on January 28 restricted buy orders on some of this month’s most important stocks, thousands of small traders simultaneously used social media to express outrage, seek redress and urge each other to “hold the line” and not sell their shares.
Although the story of David versus Goliath has always been exaggerated, populist anger against brokerage firms for restricting trade is real – and this anger immediately resonated in Washington, where several members of Congress called for an investigation into the matter.
This moment in the market, with its wave of technology-related social speculation, is reminiscent of 1999 and early 2000, when television ads for brokerage firms celebrated Mothers in Pajamas and claimed that trailer drivers could afford to buy tropical islands.
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It also recalls 1901, when investors with ample access to the telegraph and telephone were brimming with enthusiasm for the new century. Total trading volume on the New York Stock Exchange doubled from the previous year to a then unprecedented 209 million shares. By April 24 of that year, two-thirds of the total number of shares traded on the New York Stock Exchange were listed.
Union Pacific Corp.
outstanding shares changed hands. On the New York Stock Exchange (NYSE), annual turnover – a measure of the speed at which shares trade – reached 319 percent, a record that will not be surpassed for another century or so.
In thousands of “bucket shops,” individuals bet on a rise or fall in stock prices without having to buy them themselves. With directional bets as low as $5 or $10, well below the minimum required by the big companies of the day, the bucket shops thrived – even though they were illegal in many states.
“The desire to get rich without working has prevailed among men of all times,” wrote journalist and economist Horace White in 1909, “and will undoubtedly continue to exist as long as human nature remains unchanged.
Which brings us back to today’s Flash Mob merchants. Aside from the few stocks that are their favorites, how have they affected the stock market as a whole?
In the SPDR S&P Retail exchange-traded fund, which aims to hold about 100 stocks in equal shares, GameStop reached 19.9% of total assets on January 27. But these small specialized funds are just drops in an ocean of the U.S. stock market that is worth about $42 trillion.
As of December 31, stocks that were severely undervalued included
AMC Entertainment Holdings Inc,
and others that have been popular lately with the flash mob, accounted for only 0.13% of the S&P 500 and only 4 to 5% of the major stock market indexes for small companies, according to Matarin Capital Management, a New York-based investment firm.
On January 27, the shortest stocks still represented only 0.17% of the S&P 500, after doubling to 8.6% of the S&P 600 Small Cap Index and 11% of the Russell Microcap Index. But investors who are well-diversified are unlikely to notice much.
Volatility in the S&P 500 is up slightly in 2021, but is still close to the median level since 1928, according to Chicago-based investment firm Distillate Capital Partners LLC. Even the S&P 600 Small Stocks Index, which includes GameStop and other Flash Mob favorites, fluctuates about a third less than its long-term average in 2021.
Taken together, these indicators suggest that flash mobs have little impact on the stocks they choose to trade.
The momentary computer glitch that caused the “Flash Crash” on May 6, 2010, upset all those who traded in a very short period, but left long-term investors indifferent. This latest shock is also likely to affect investors’ attention rather than their portfolios.
Financial “flash mobs” may be a symbol or symptom of the populist upheavals that have gripped the world in recent years. It is unlikely that they are the cause.
E-mail Jason Zweig at [email protected]
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