GAMESTOP OR GAME OVER FOR MASSIVE FINANCIAL INVESTMENTS?

The resounding GameStop case may mark a turning point in the financial markets and brings back to the forefront the unresolved problem of supervision, rules and adequacy of financial information.

What happened in the last week of January and that the founder of the social network Reddit has called “a revolution from below”, triggering the fury of the U.S. Congresswoman Ocasio Cortez in defense of retail traders is a giant countermove to the short positions (or short sales) opened by some hedge funds. On what? On some stocks such as GameStop, Nokia and Blackberry, which are in serious budget difficulties due to the obsolescence of their primary business and the need to downsize staff and structures.

 

Retail traders are now over six million: they have coordinated on social media and doubled their numbers in one week. The large number of orders has produced, for the first time in the history of finance, such impressive price fluctuations as to force hedge funds to quickly review their strategies, which seemed to bring easy money. The price rebound was so large that it caused hedge funds heavy losses: in three days, prices exceeded the increase of the last ten years.

 

The question is whether we can speak of a democratization of finance, which thanks to social media has seen millions of traders communicate simultaneously, especially through Reddit’s WallStreetBets forum and exchange their strategies by organizing a synchronized attack. 

These are investors who are free from commissions, from regulations for institutional traders, and above all, from customers to whom they are accountable. The operation has been favored by the pandemic, which sees millions of people locked at home by the lockdown and ready to bet online through options, i.e. leveraged derivative securities: tools that can produce quick gains, but also serious losses, and therefore should be handled with care.

 

We are talking above all about millenials, in the 35-40 age bracket, who have allocated from 5 to 25% of their own portfolio to speculative bets conveyed through increasingly sophisticated and professional trading platforms, so much so that the trading volumes handled on the New York Stock Exchange have doubled in one year.

The truth is that we are dealing with a middle class put to the test by the pandemic and that is looking for redemption on the US Stock Exchange.  A very different market from the European one in many ways:

  • number of investors involved in stock trading;
  • high capitalization of the shares traded;
  • wide diffusion of trading on deregulated platforms;
  • liquidity of the options market;
  • liberalization of control regulations;
  • extreme caution on the part of supervisory bodies not to subvert a free market.

 

Bad news for the newly elected Janet Yellen, who after being the first woman to lead the Fed has now become the first woman to lead the U.S. Treasury. As soon as she took office, Yellen immediately reproached senators, urging them to quickly approve the new aid and incentive package for the economy. While concerns about the real economy are growing, the valuation of the nearly thirty companies targeted by speculation is also rising. However, new values produced by what has been called a “financial flashmob” do not necessarily represent reality or salvation for these companies, which would need to seize the moment with rapid changes on the governance and corporate policy front.  In any case, the value of the shares will undoubtedly level off towards more realistic prices compared to the balance sheet numbers, as always happens in financial markets.

 

THE WITCH HUNT THAT IS A DEAD END: SOCIAL MEDIA WIN

After what happened, Democrats and Republicans could initiate a review of Section 230 of the Communications Decency Act of 1996, the provision that limits the liability of social media companies for “content that users write or post.” A year ago, current President Joe Biden already said the provision should be ” immediately revoked”.

 

In detail, the law states that with the exception of illegal materials such as child pornography social media can host anything and use their community standards to remove only what they consider offensive. In the multitude of fake or replicated accounts, anonymity (which is guaranteed by the law) feeds a series of phenomena: from simple offence to defamation, from spreading fake news to launching speculations such as the one organized on GameStop’s shares.

 

However, it would not be easy for social networks to follow stricter rules, such as those set out in banking, insurance and business regulations (known as KYC). A compromise could be reached, however, by implementing the recognition standards developed in recent years to combat money laundering, terrorism and illicit financing. In any case, there are still many grey areas, and it seems that supervision especially in Anglo-Saxon countries is chasing digital evolution rather than riding it.

 

At this point, not only Yellen, but also the ECB will have to face a not easy challenge. We are not talking about the protection of savers, but of investors who turn speculation into gambling, putting part of their economic resources at stake. The phenomenon is difficult to contain, also because at the same time it is not possible to further increase the pressure on investment funds, which already have well-defined and strict obligations towards the supervisory authorities, especially in Europe.

 

Thanks to careful and recent legislation, it is not easy for Italian investors to manage speculations coordinated between social and trading platforms, but this does not change the fact that solicitations to join platforms for speculations through options and other tools are everyday occurrences. Moreover, some traders operate on non-EU platforms, which remain under observation.

 

As we know, gambling is allowed by law in Italy, regardless of the increase in gambling disorders. The risks of gambling are the same as those of betting on the stock market: it has always been so, ever since the tulip mania of the mid 1600s in Holland, which represented the first great financial crisis triggered by speculative financial instruments. In four centuries, products have changed from flowers to video games but the human soul has remained the same.

Image created by it.freepik.com

About the author, valentina.attanasio@gltfoundation.com

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