It would be no surprise to you that low-volume stocks have always been subject to speculative practices. They were usually the ideal target for infamous short-sellers, positioning to benefit from a decrease in the stock price, such as Muddy Waters or Citron Research. The latter hastily put-up half-baked analysis that they label to the market as whistle-blower-fundamental-research recommending to sell the stock. And, oh surprise, they would make sure to take short positions in the very same stock ahead of their report release.
Although they may have rightly called out a few improper practices at some companies, most of their business is predicated on the wolf-pack strategy looking for the weaker animal of the stock herd by exploiting regulation loopholes. Now some other predators are going after the wolves.
It all started with a Subreddit trail named #WallStreetBets, with day-traders ganging up to buy stocks with low volume and a high percentage of shorts. Their goal: having fun in defeating large short-sellers, and making some money along. They successfully took GameStop from $90 to $500 in 2 days (!), among a couple of others.
Such play has been made easier through the use of fractional shares, options, margin lending, and social networks. All these have brought the efforts of thousands of day-traders to the power of N. To be fair, their process has been rather joyful and funny to observe, a clear departure from traditional serious-de-rigueur Wall Street approach. However, there is no doubt it will end up in tears.
First, this is a further evidence of frothy markets, with a blatant disconnect between valuation and reality. Secondly, the fun stops abruptly when the first #WSB member starts selling, then snow-balling others in a profit-taking bloodbath. Lastly, the SEC might want to ask a few questions.
Certainly, it is an interesting excess to learn from when we try to find the right measure for social media, & democratization of trading, and place this in the perspective of growing discontent with larger financial firms, whose stewardship and fiduciary role failed to impress. Overall, financial institutions are still more interested in preserving their moats than fairly advancing their clients wealth and knowledge.
We, for one, believe that financial education comes first, and the growing power of retail investing tools are only best used with a greater consideration for ethics. Like our scholar-friend Spiderman would say “great power comes with great responsibility”.
360 Advisory – Markets