The real power behind the GameStop revolution

This movement is the culmination of nearly five decades of market democratization, initiated by none other than the late Vanguard Group founder, Jack Bogle.

Despite all the hyperventilation during this week’s financial revolution, investors should view it as the last stage in a long evolution – and unlikely to disrupt markets in general.

Still, this is a remarkable moment. It’s like a bunch of pastry chefs watching a Los Angeles Lakers basketball game on TV, pouring in their beer and nachos, storming onto the court – then blocking LeBron James’ shots and plunging mercilessly on Anthony Davis.

Amateur investors have always had advantages over professionals: they can invest for the long term and ignore the short term, as they cannot be fired for underperformance and have no clients to give them (or take away) money in worst time.

Now amateur merchants also claim their benefits. They can communicate instantly, associate with thousands – maybe millions – and buy or sell without commission.

Thousands of members of WallStreetBets, a forum on the online community reddit.com, have led the swarm of amateur individual traders who bought stocks that hedge funds and other institutional investors were betting against.

Synchronously and en masse, such traders move a stock up or down, even if each trader only bets a few dollars. Professionals, on the other hand, are legally barred from colluding and incur much higher brokerage fees.

These new crowds of amateur traders resemble flocks of animals that often congregate in the wild. You may have seen videos of a huge school of fish flashing through the sea at the same time or a murmur of starlings forming a huge swirling vortex in the air.

These swarms change direction in fast, coordinated bursts to find prey and avoid predators.

But it is simplistic to think of this trade move as a head-on attack on the Wall Street elite by Joe Schmo and Jane Doe.

The caricature of this new breed of fast-moving merchants is a 19-year-old living in Mom’s basement. Trapped and bored by the pandemic, with fewer sporting events to bet on and incentive checks (or “stimmies”) burning a hole in his pocket, he gets his kick out of trading stocks. Often times he buys and sells options, which can yield even bigger, faster profits.

There is some truth to that stereotype. The WallStreetBets culture can be coarse and coarse, looking for short-term excitement without regard to risk. Still, some of its leaders are very sophisticated, and not everyone who piles up in stocks this week belongs to WallStreetBets.

Sean Mattingly is a 35-year-old semiconductor engineer based in the Portland, Oregon area. He prefers a simple, diversified portfolio of low-cost index funds in which he almost never trades.

On January 25, Mr. Mattingly at Bogleheads.org, one of his favorite websites advocating long-term investment. There, Mr. Mattingly stumbled across a reference to GameStop’s wild price movements.

As careful as he is, he likes to set aside up to 5% of his wallet for what he calls funny money. After a visit to WallStreetBets he thought, “Wow, this might be fun. I’ll take a chance and see what happens.”

He bought “less than 20” shares of GameStop for approximately $ 110 on January 26th. Mr. Mattingly says it was “absolutely fun” to own GameStop, which came in at a whopping $ 483 this week. But, he says, “it was also a lot of fun – without expecting – to be part of what a movement is becoming.” (He says he sold for $ 400 a share on the morning of January 29, and it “felt great.”)

That move is Mr. Bogle’s monstrous love child. It is the culmination of 45 years of unrelenting decline in investment costs that began when the late Vanguard founder founded the first index mutual fund in 1975. Stock funds used to carry commissions up to 8% and annual expenses up to 2%. ; now you can buy index funds with no commission and spend less than 0.05% per year.

Decades ago, small investors paid perhaps 5% to trade a stock. A stockbroker was a 9-to-5 man in a paneled office who plucked your pocket with every trade. Today, your broker is in your pocket, as apps on your phone let you trade stocks at zero commissions whenever you want.

WallStreetBets is the ultimate phase of this evolution. Thousands of people can amass small transactions into gigantic pools of capital and whip each other into a collective frenzy.

In what neuroscientists call “dynamic coupling,” the brain activations of different people performing the same task come together and fire in sync. In situations like this, says Uri Hasson, a neuroscientist at Princeton University, “I shape the way you behave and you shape the way I behave. And coordinated behavior of many individuals can generate dynamics greater than anything they could produce individually. “

That can also cause emotions to run high. While short-selling hedge funds are quite small in the financial ecosystem and their managers are more likely to be misfits than establishment members, the flash mobs have sometimes portrayed them as Goliaths.

And when leading online brokerage firms restricted buy orders for some of this month’s hottest stocks on January 28, thousands of small traders took to social media at the same time. express outrage, demand redress and urge each other to “HOLD THE LINE, ”By not selling their shares.

While the David-versus-Goliath story has always been exaggerated, the populist rage against brokerage firms for restricting trading is real – and was immediately reflected in Washington, where several members of Congress called for an investigation into the matter.

This market moment, with its wave of tech-driven social speculation, echoes 1999 and early 2000, when TV ads for brokerage firms celebrated mothers day trading in their pajamas, claiming that tow truck drivers could afford to buy tropical islands.

It is also reminiscent of 1901, when investors with widespread access to the telegraph and telephone excited the new century. The total trading volume on the New York Stock Exchange doubled from the previous year to an then unheard of 209 million shares. On April 24 of that year two-thirds of all of Union Pacific Corps

outstanding shares changed hands. Across the NYSE, annual sales, a measure of the speed at which stocks are traded, reached 319%, a record that would not be surpassed in about a century.

At thousands of so-called bucket shops, individuals gambled whether stock prices would rise or fall without having to buy shares. Taking directional bets as low as $ 5 or $ 10, well below the minimum required by legitimate companies at the time, the bucket shops boomed – even though they were illegal in many states.

“The desire to become rich without labor has prevailed among men of all ages,” wrote journalist and economist Horace White in 1909, “and will no doubt persist as long as human nature remains unchanged.”

Which brings us back to today’s flash mob traders. Other than the few stocks that are their favorite toys, how have they affected the stock market as a whole?

At the SPDR S&P Retail exchange-traded fund, which aims to own roughly the same amount of its approximately 100 holdings, GameStop reached 19.9% ​​of total assets on January 27. But such small and specialized funds are just droplets in the ocean of about $ 42 trillion of the US stock market.

As of December 31, stocks with high short positions such as AMC Entertainment Holdings Inc.,

BlackBerry Ltd.

, i robot Corp.

According to New York-based investment firm Matarin Capital Management, others recently favored by the flash mob made up only 0.13% of the S&P 500 and only 4% to 5% of the leading small stock indexes.

On January 27, the stocks with the most short positions still accounted for only 0.17% of the S&P 500. They more than doubled to approximately 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 feel a major impact.

The volatility for the S&P 500 so far in 2021 has risen a bit, but is still almost exactly in the midst of levels recorded since 1928, according to Distillate Capital Partners LLC., A Chicago-based investment company. Even the S&P 600 small stock index, which includes GameStop and several other flash mob favorites, fluctuated about a third less than the long-term average in 2021.

Taken together, these indicators suggest that the flash mobs have not had any significant effects beyond the two or three dozen stocks they prefer to trade.

The temporary glitch in computer trading that triggered the “flash crash” of May 6, 2010 was troubling to anyone who traded within a short timeframe but left longer-term investors unharmed. Likewise, this latest turn is likely to have a greater impact on investors’ attention than on their portfolios.

The financial flash mobs may be a symbol or symptom of the populist dislocation that has engulfed the world in recent years. They probably won’t be the cause of it.

Write to Jason Zweig at [email protected]