The financial system suffers from time to time a seizure that questions its foundations. In the last week, Wall Street has witnessed an unprecedented movement in amazement. A multitude of small investors, acting in a coordinated way through a forum on the Reddit platform, has put some of the world’s largest hedge funds on the ropes. And they have succeeded using their own medicine: speculation. By buying a large number of shares in troubled companies like GameStop or AMC in unison, they have caused their prices to skyrocket at first. That has ruined the strategy of many hedge funds that had bearish positions on those same stocks.
The coup d’état of the small joint investors uncovers several inefficiencies in the functioning of the markets that should be repaired as soon as possible so that capitalism does not continue to be a source of discontent from which the populist parties drink. The first of the failures is the increasing marginalization of minority shareholders. The concentration of power in the hands of a handful of large fund managers is increasing and their movements condition the future of the price of any asset. The ordinary investor is relegated to a secondary role in the IPOs, takeover bids and shareholders’ meetings. In addition, the foreros revolt has been possible thanks to the popularization of the Internet, which facilitates the sharing of objectives thanks to digital agoras and access to the trading floor with low-cost commission agents. However, the democratization that technology brings implies that many people without sufficient financial culture, pushed by the low interest rates of the most conservative investment products, try their luck in the stormy waters of the stock market without the advice of professionals, with the high risk that this implies.
Another point for reflection is the use of short selling. This type of operation, very common in certain hedge funds, consists of borrowing shares of companies in difficulty to sell them on the market with the idea of later buying them back at a lower price and recording the capital gain. Beyond the debate – almost moral – of whether the one who bets only down or those who invest expecting increases in prices is more speculative, the truth is that bearish strategies increase market volatility. In Spain, both in the financial crisis and after the outbreak of the coronavirus, the stock market supervisor temporarily suspended its use. More transparency should be required for short sales because, although they have positive effects such as giving the market more liquidity, they undoubtedly generate a clear distorting effect under certain circumstances.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.