What happened in the last week of January – and what the founder of the Reddit social network defined as “a revolution that started from below”, unleashing the fury of US deputy Ocasio Cortez in defense of retail traders – is a giant counter-move to short positions (or short selling) opened by some hedge funds (or hedge funds). On what? On some titles like GameStop, Nokia, and Blackberry, in serious financial difficulties due to the obsolescence of their primary business and the need to run for cover with downsizing of personnel and structures.
Retail traders are now over six million: they coordinated on social media and doubled their number in a week. Their avalanche of orders has produced for the first time in the history of finance price fluctuations so impressive as to force speculative funds to quickly review their strategies, which seemed to bring easy money. The rebound in quotations was so large as to cause heavy losses to hedge funds: in three days, prices exceeded the growth accumulated over the last ten years.
One wonders if we can talk about a democratization of finance, which thanks to social media has seen millions of traders communicate simultaneously, especially through the Reddit WallStreetBets forum, and exchange their strategies by organizing a synchronized attack. These are investors free from lump sum commissions, from the regulations for institutional operators and above all from customers to whom to answer. The operation was favored by the pandemic, which sees millions of people locked up at home by the lockdown and ready to bet online through options, i.e. leveraged derivative securities: instruments that can produce quick gains, but also serious losses, and which therefore should be handled with care.
We are mainly talking about Millenials, in the 35-40 age group, which they intended from 5 to 25% of its portfolio to speculative bets conveyed through trading platforms increasingly sophisticated and professional. So much so that trading volumes, traded on the New York Stock Exchange, have doubled in one year. So even if someone talks about David against Goliath, the truth is that we are dealing with a middle class severely tested by the pandemic that is looking for a revenge on the US stock market. A very different market from the European one in several respects:
- number of investors involved in equity trading;
- high capitalization of the shares traded;
- widespread diffusion of trading on deregulated platforms;
- options market liquidity;
- liberalization of control regulations;
- extreme prudence of supervisory bodies in not subverting a free market.
A bad problem for newly elected Janet Yellen, who after being the first woman to lead the Fed has now become the first woman to lead the US Treasury. As soon as she took office, Yellen immediately scolded the senators, urging them to quickly approve the new aid and stimulus package for the economy. And while worries about the real economy are growing, so is the valuation of those thirty companies targeted by speculation. However, the new values produced by what has been called a “financial flashmob” they do not necessarily represent reality or even salvation for these societies, who would need to seize the moment with rapid changes in corporate governance and policies. In any case, the value of the shares will undoubtedly level off towards more realistic prices compared to budget numbers, as always happens on the financial markets.
THE WITCH HUNT THAT IS A BLIND ALLEY: SOCIAL MEDIA WIN
After what happened, Democrats and Republicans could initiate a review of Section 230 of the Communications Decency Act of 1996, the provision that limits the liability of social media companies for "content that users write or post in video". Already a year ago the current President Joe Biden said that the law had to be "immediately revoked".
In detail, the law establishes that – with the exception of illegal materials such as child pornography – social media can host anything and use its own community standards to only take down what they find offensive. In the plethora of fake or replicated accounts, anonymity (which in turn is guaranteed by law) feeds a series of phenomena: from simple offense to defamation, from spreading fake news to launching speculations such as the one organized on the shares of GameStop.
On the other hand, it would not be easy for social networks to follow more stringent rules, such as those required by banking, insurance and company regulations (known as KYC, an English acronym for "know your customer"). However, a compromise could be reached, i.e.implementation of recognition standards developed in recent years to combat money laundering, terrorism and illegal financing. In any case, gray areas remain many and it really seems that the supervisory authorities – especially in Anglo-Saxon countries – are chasing digital evolution rather than riding it.
At this point, not only Yellen, but also the ECB will have to face a difficult challenge. We are not talking about the protection of savers, but about investors who make speculation a game of chance, putting part of its economic resources on the plate. The phenomenon is difficult to contain, also because at the same time it is not possible to further tighten the mesh on investment funds, already affected by well-defined and stringent obligations towards the supervisory authorities, especially in Europe.
Thanks to careful and recent legislation, it is not easy for Italian investors to manage coordinated speculation between social networks and trading platforms, but this does not change the fact that solicitations to join platforms for speculation - through options and other derivative instruments - are all 'agenda. Moreover, some traders operate on non-EU platforms, which remain under observation.
But you know, gambling is permitted by law in Italy, regardless of the increase in gambling addiction. AND the risks of gambling are the same as those of stock market bets: it has always been like this, since the tulip bubble of the mid-1600s in Holland, which represented the first major financial crisis triggered by speculative financial instruments. Products have changed in four centuries – from flowers to video games – but the human soul has remained the same.
