Commentary: GameStop and how WallStreetBets may disrupt financial markets permanently
It is easy to dismiss retail investors as uneducated masses who will lose the shirts on their backs but users on forums like WallStreetBets are reshaping financial markets, says a marketing professor.
MONTREAL, Canada: If the financial world follows the pattern seen a decade or so ago in other markets, such as fashion and music, Reddit’s WallStreetBets (r/wallstreetbets) phenomenon might have transformed investing forever.
In the fashion, financial and music markets, hundreds of thousands of people are highly engaged and share their passion online, and can fuel significant transformations without necessarily wanting to do so.
WallStreetBets is now reshaping financial markets in three important ways: Amateur market participants, or retail investors, have taken on work traditionally done by financial advisers, analysts and educators, changing who does what in the market.
They’ve introduced new ways of thinking about investing. And they’ve strengthened the influence of retail investors across the board.
In response, professional financial stakeholders are trying to delegitimise retail investors to maintain their influence.
RETAIL INVESTORS LEARN AND INVEST DIFFERENTLY
The changes have been brought about by retail investors meeting and exchanging information online, such as on Reddit forums, Discord groups, YouTube channels, Twitter and Stocktwits, on how to perform the type of work traditionally done by financial sector advisers and analysts.
Instead of getting their investment education the usual way, via courses at colleges and universities, retail investors learned online, among themselves.
Consequently, retail investors have spurred changes in the work performed by professional financial advisers, analysts and educators, as well as institutional investors.
Some have argued that the greater transparency regarding the investment techniques being discussed openly online could “force greater transparency on the institutional side".
These new retail investors are also fuelling a different way of thinking about investing. At least for some members of WallStreetBets, investing is part bet, part joke, part driven by mischievous Redditors and part get-rich-quick scheme.
For others, WallStreetBets represents an opportunity to exploit and expose weaknesses in the financial markets. Others, though, are competent investors.
READ: Commentary: GameStop insanity has painful lessons on short-selling and more for retail investors
Whatever the goal pursued, the beliefs and risky behaviour of this new breed of retail investors are a far cry from those that often characterise typical stock market investors, many of whom heed financial advisers and favour long-term investments in safe opportunities like blue chip stocks, mutual funds or, for the riskier investor, exchange-traded funds, or ETFs.
These contrasting beliefs are the topic of many humorous videos and memes. Until now, retail investors have usually been the customers of financial institutions.
Institutional investors, such as large banks and hedge funds and their wealthy clients, were traditionally seen as the “smart money” who influence the movement of markets.
Smart money is typically portrayed as involving successful, respected investors who possess important knowledge of financial markets.
Yet this influential group comprises “hundreds of mini Mike Tysons” who together yielded enough power to cause billions of dollars in losses to established financial firms.
REACTIONS BY FINANCE PROFESSIONALS
Whether they’re fashion houses or record companies or hedge funds and wealth management companies, people in power typically try to undermine the threat posed by market transformations that could upend their business model and minimise their influence.
In the financial world, reactions to WallStreetBets have been varied. Trading platforms have tried to curb the power of Redditors by limiting transactions under the rationale of protecting consumers.
Many analysts and investors have also derided WallStreetBets investors as uneducated people who might lose their shirts on their bets.
In much of the news coverage, analysts have reaffirmed their knowledge of the financial markets and levelled insults at the WallStreetBets investors.
As of Monday (Feb 1), there were about eight million members on Reddit’s WallStreetBets, but it’s only one of many online sites where retail investors are learning, interacting and sharing investment ideas.
Together, these amateur investors are altering some long-held beliefs about investing and they’re gaining influence in the market in the process.
These retail investors aren’t part of an organised movement trying to transform the workings of the financial market. Yet, as the GameSpot saga exemplifies, their online interactions have reshaped the power dynamic between retail and institutional investors.
WallStreetBets Redditors helped propel GameStop’s stock price to soar, forcing a halt in trading. What does the future hold for the financial world? Take your bet.
If none of what happened with GameStop made sense to you, listen to financial veterans break down how different players powered the surge and which listed company could see copycat attacks in CNA's Heart of the Matter podcast:
Pierre-Yann Dolbec is Assistant Professor in Marketing and Research Chair in Complexity and Markets, Concordia University. This commentary first appeared in The Conversation.