The most interesting and likely most entertaining thing that happend the last weeks is the speculation battle that is currently playing out on the stock markets.
To shortly sum up what is happening. There are gamers and betters discussing the coordinated buying of stocks via a board at reddit. Essentially they look for a corner market, so where not many stocks are available and then try to influence the price by controlling the available amount. The same thing is happening with collector items offered on ebay.
It becomes interesting because hedgefunds have borrowed and then sold a lot of stocks in some of those companies. So what happens is that the coordinated buying of stocks leads to increasing prices and therefore book losses to these hedgefunds, that at some point need to either bring up enough cash to be able to cover those losses or they are forced to get rid of the risk by buying the stock back.
As the stock price is already high and additional buying further increases the price this makes it more painful to even their position. They increase the price for themselves while buying back. If that is not already fun, it becomes even better. The hedgefunds sold so many stocks of those companies that there is not enough to buy them back. In some stocks they were able to sell stocks either “naked” so they practically did not even exist, or through chain-lending, so one stock got sold and then lend again by its new owner.
Now what happens to the price if you try to buy back more stocks than exist. Exactly. Thats why one of the distinctive marks of that group is a rocket emote.
This is now such a widespread phenomenon that it developed a dynamic of its own, much to the fun of Elon Musk that seems to enjoy the game in his own way, causing even more flucutation.
The ongoing democratization of “investing” via neobrokers is attracting a lot of new players. A true crowdsourcing initiative was born to enter a playing field that formerly was well protected by moats of size, entry cost and access rights.
The involved hedgefunds that went short suffered a big blow. Not only had gamers unveiled a weakness in their investment strategy, other hedgefunds would jump on the train and happily help to pummel a competitor into the ground. That is not unusual, hedgefunds are somewhat the hyena of the captial market, eating up anything that is dead or too weak to run away. That could be one of the reasons hedgefunds are not very well liked. While sometimes the aversion is misplaced, often enough they are disliked for a good reason. So this is a true underdog story and symphaties are clear.
What we need to accept though is that not only short selling hedgefunds are negatively affected, but the whole chain of transaction partners. The investor buys from the neobroker, they interact with a clearing party that manages interaction with the stock market and the same chain back to the other investor, so a buy and a sell can be facilitated. All of them have problems with these interactions. It would be interesting to know if the intermediaries only have massive problems from the depository requirements they have to make for the trades, or if the immense moves in price also generate counterparty losses from the way they do their business. In any case this will most certainly influence the margin they take from all interactions or, likely and, lead to limitations to the possiblities these neobrokers currently offer.
The boomer as the antagonist
While the technicalities of the process are facinating, I do want to stop here and rather highlight another important perspective that is not yet covered very well but might indicate a much more relevant development.
Inside the reddit group and now in many other platforms a broader and deeper realization of many facets of the problems our current system inherits shaped and was acted upon. Like many of the broad movements there is no clear agenda but rather a shared sense of perspective.
Here it is small versus big, but it is also young versus old. The “enemy” is not the hedgefund alone, it’s the “boomer”, the old white men whos time to rule is coming to an end, or in their opinion at least it should.
A democratized understanding of the inherent issues with the current structure of our system and the realization that there are chances to not feel, or be, powerless could make this one important step towards a turning point for a development that has to be expected.
There is an implicit generational contract in a society and for many, mainly demographical, reasons, it is about to break. The current generations are taking more of our earth than they give back. They reap the rewards of a society without enabling the following generations to do the same.
In the US education is growing increasingly expensive with decreasing income estimations. Germany so far has a social system that seems to be cumbling.
While our parents had to earn 22 times as much as the average to pay top income tax rate it is now double, due to blatant bracket creep. Current pensioneers are beneficiaries of heavily tax-subsidized pension payments altough our system is a pay as you go system. If you don’t bear children and educate them to obtain a job that pays into the pension system, as a society you should not be getting much pension. It could be argued they did not raise children and rather spent the money on something else. Reaching pension age, they want money from the children of those that acually did. These children are now pressed ever harder by an increasing amount of old people, that live longer than before and soon pose the biggest voter group. Good perspectives looking into the future.
The financial and corona crisis with the following central bank interventions led to an increase of real estate prices so that a junior professior and his wife, both with an academic full time job, don’t even come close to being able to finance a house in my home town. Much less any of the majority of people that earn average or below. Without a positive perspective anger will keep growing into a conflict that is forseeable.
The same is true for the distribution between companies and private households. Symbolic for this development are the american internet giants. They do not only openly extend their monopolies, that should usually be handled by antitrust authorities, but they completely associalised themselves from society by not paying taxes. Their good marketing and immense political lobbying uphold a positive image for now.
A growing realization that society is impotent to enforce essential obligations of any company led to a market that is creating an unfair competitive disadvantage to any company that is still paying taxes. So many companies now do the same, creating a tax-avoidance industry, binding clever people into a worldwide scheme to harm and slowly bleed out many of the societies they want to live in. These people could do so much good instead, would they use the same energy on something else.
This brings us back to the hedgefunds or a systemic, if you will structural, corruption in our financial system. Some participants have protected competitive advantages in the market, such as regulation and size related entry barriers, like hedgefunds, or access related advantages such as hyperfrequency traders, done by banks but also by hedgefunds. While we seem to have regulations that keep new players from entering the market others are free to behaviour that must seem ethically unsound to many. Just giving one example, if a private investor places an order, it actually is possible to sell this information, so someone can look at all markets for prices, then buy the stocks you want and sell it to you for a higher price. So your own broker makes sure you have zero benefit from externalities of price finding mechanisms in the market.
There are arguments that illustrate why this could be seen as something beneficial, yet questions remain why so many participants between buyer and seller can so handsomely live of this and how necessary they really are.
Bill Gates once said: “Banking is essential. Banks are not”. To paraphrase, a search engine is essential, google is not. So if provision of equity is necessary, intermediaries not necessarily are. The ideas around block-chain already discuss ways to revolutionize the way we handle banking and financial interactions, potentially reducing banks and other intermediaries to really expensive job creating measures.
As long as most people ignored the structures around them, some could benefit while others would not realize a difference. But if the democratization of access leads to a broader interest and understanding, it might very well lead to questions raised that at some point could not be ignored any longer.
We have seen this with changes to our ecological behaviour. The EU has just announced a green new deal, trying to change a complete economy.
Who knows, maybe one day we might be seeing an effort to restructure our financial system as well. I somehow doubt it, because it lacks the same urgency as climate change, but then I believe mankind is always good for a surprise. At least once in a while.