The stock market turned into a spectacle for rival Super Bowl LV this week, as retail investors and hedge funds faced a close on Gametop stock. Tom Brady and Patrick Mahomes have a hard time entertaining audiences as this latest move into the financial entertainment market for audiences around the world.
Punishment on stock is always a game element: the thrill of placing a bet and watching the game. But financial markets now offer opportunities for entertainment as well as war. The coping element was introduced with the proliferation of hedge funds that were small stocks to actively hedge their positions. Extensive shortening – when you borrow a share, sell it, and expect to buy it back at a lower price – ensures that Long (the stock’s owner) sets up against shorts in a zero-sum game. Huh. The game was complete, battling the wicked hedge funds underperforming the stock, with a moral story of good individual investors on Reddit. In a populist moment, what could be more fun than watching a deadly fight between individuals and institutions, outsiders and insiders?
How did financial markets simplify? There are many criminals, including a bored and socially distracted workforce who stare at screens during epidemics, and low interest rates that traditionally make silly savings and borrow stocks to buy cheap, but most There is significant retail investor resurgence. You cannot harm an industry as a whole without finding a technique to allow many new players.
Over the last five decades, institutional investors became the dominant force in the financial markets. The rise of defined benefit plans and thereafter consolidated market power among mutual funds for defined contribution plans where workers invest retirement assets and hedge funds that promise exorbitant returns to pension plans and endowment managers. But that changed two years ago.
A fundamental change in the business model of financial brokerage brought the retail investor back: the rise of zero-commission trading. Commissions were already under pressure as new entrants – notably Robinhood – were funded by venture capitalists who were constrained with capital eager to find another industry. The brokerage realized that their business model was upside down. They did not need to charge their customers commissions to make money; There was a lot of money to be made No Charging your customers. The attraction of “free” —divided by Facebook and Google — far exceeded the traditional business model.
As we learned from the internet, what we see is free. The way Facebook and Google demonetize user information by selling ads, Robinhood and all the brokerages that have migrated to zero-cost commissions. But there is a twist. Brokerages do not sell their users’ information; They sell the lack of it. The fundamental problem for market makers in financial markets is the danger of transacting information with them – no one wants to trade with anyone with more information because they know they will lose. This problem is one that creates the difference between so-called bid-ask spreads (the price at which you can buy and sell an asset) as they spread rewarding market-makers for the risk of transactions with informed traders. .
Robinhood and other zero-cost brokerages demonize their hold on active traders who are certainly uninformed. They sell these trades to a new generation of market makers, such as Ciadal Securities, who pay the ability to spread a bid-ask without risking trading with informed traders. Retail investors get to trade for free, new generations of Wall Street such as Citadel, demonetize their ignorance, and old-line investment banks that used to spread bid-ask like Goldman Sachs Have become. A commercial bank and a hedge fund. Everyone has fun.
Simplification of financial markets comes with many costs. This will end badly for retail investors, although it is unclear when and how, and some will make money along the way. In the process, financial markets will do what they have done for centuries, although this is rarely accepted: real wealth from real money without notice. Every bubble is associated with redistribution, and most of Alpha’s claims about professional investors are nothing more than the benefits of redistribution time from other parties. Current populist moments in financial markets, like many other populist moments, will only serve to increase that redistribution toward the rich and informed, while everyone suggests it is doing the opposite.
Even more is at stake for the real economy. Financial markets are meant to provide price signals that help allocate resources and provide capital to create capital from savers. Gamification reduces those critical functions to a limit. As retail investors grapple with their losses, they will lose confidence in the valuable functions offered by the financial markets.
As with Facebook, or any seemingly “free” market, putting genie back in the bottle would not be straightforward. It is unclear how to regulate a market where participants are voluntarily attracting their attention. Individuals are not being charged anything, and there is no clear information that is being capitalized incorrectly. Nevertheless there will be losses over time and financial markets will suffer further losses in reliability. Until that raking, your long lasting health would be best served by being a fan and not a player – if you can fill the stomach then what the game is doing for players is that.