EVENTS ON Wall Street have become so strange that Netflix is said to be planning a show to immortalise them. But what should be the plot? One story is of an anti-establishment movement causing chaos in high finance, just as it has in politics. Another is how volatile shares, strutting online traders and cash-crunches at brokerage firms signal that a toppy market is poised to crash. Both gloss over what is really going on. Information technology is being used to make trading free, shift information flows and catalyse new business models, transforming how markets work (see article). And, despite the clamour of recent weeks, this promises to bring big long-term benefits.
Don’t expect screenwriters to dwell on that, obviously. Their focus will be the 8m followers of WallStreetBets, an investment forum on Reddit, who have invented a new financial adventurism: call it swarm trading. Together, they bid up the prices of some obscure firms in late January. This triggered vast losses at hedge funds that had bet on share prices falling (see Buttonwood). And it led to a cash squeeze at online brokers which must post collateral if volatility rises. Since January 28th the most prominent, Robinhood, has raised $3.4bn to shore itself up.
The swarm seems to have moved on. This week the price of some favoured shares sank and silver leapt. Meanwhile, in many markets the normal rules of play have been suspended. Almost 300 “SPACS” listed last year, raising over $80bn and allowing firms to float without the hassle of an initial public offering (IPO). Tesla has become America’s fifth most valuable firm. Bitcoin, having gone from the fringe to the mainstream, has a total value of $680bn. Trading volumes for shares are at their highest in at least a decade and those for some derivatives are off the charts.
Part of the reason for this is that government bail-outs have put a floor under risky debt. Banks have so much spare cash—JPMorgan Chase’s pile has risen by $580bn in the pandemic—that they are turning depositors away. Instead of using the lockdown to learn Mandarin and discover Tolstoy, some people have used their stimulus cheques to daytrade. Although the whiff of mania is alarming, you can find reasons to support today’s prices. When interest rates are so low, other assets look relatively attractive. Compared with the real yield on five-year Treasuries, shares are cheaper than before the crash of 2000.
Yet the excitement also reflects a fundamental shift in finance. In recent decades trading costs for shares have collapsed to roughly zero. The first to benefit were quantitative funds and big asset managers such as BlackRock. Now retail investors are included, which is why they accounted for a quarter of all trading in January….
Read More: Global finance – The real revolution on Wall Street | Leaders