How activists are impacting the investing industry

The GameStop deba­cle was a water­shed moment for the invest­ment indus­try. Sud­den­ly the val­u­a­tion of shares in a list­ed com­pa­ny was being decid­ed by a co-ordi­nat­ed group of investors on social media seem­ing­ly gam­ing the sys­tem. 

Tes­la and SpaceX boss Elon Musk’s tweets about why peo­ple should invest in cryp­tocur­ren­cy and the gam­i­fi­ca­tion of invest­ment is chang­ing the way we view prof­it and loss, with some investors post­ing evi­dence of huge loss­es to forums to gain online noto­ri­ety. 

The impact of GameStop

GameStop reached main­stream media and caught the imag­i­na­tion of many peo­ple well beyond trad­ing. So-called “activist investors” used Robin­hood, the trad­ing app, to co-ordi­nate a buy­ing fren­zy and teach hedge funds a les­son. It was hailed as a turn­ing point when small investors began to reclaim con­trol from insti­tu­tion­al investors.

Could it sig­nal the begin­ning of finance becom­ing more mer­i­to­crat­ic? Many retail investors feel they are dis­ad­van­taged in the mar­ket and that larg­er insti­tu­tions should be held more account­able for their actions. On the oth­er hand, there are those who believe there will always be a two-tier sys­tem that ben­e­fits insti­tu­tion­al investors and bro­kers, and retail investors are still denied real influ­ence or sway.

“The activ­i­ty ear­li­er this year around GameStop, AMC and Nokia was an unprece­dent­ed time for the mar­kets and def­i­nite­ly one of the more dra­mat­ic exam­ples of the pow­er of retail investors,” says Matthew Lei­bowitz, chief exec­u­tive of Stake, a plat­form that allows traders to invest direct­ly in the US mar­ket.

He argues that the rise of the retail investor had been hap­pen­ing well before the GameStop sit­u­a­tion. For the past few years, retail investors have had greater access to the mar­kets than ever before and are con­tribut­ing sig­nif­i­cant­ly more trade vol­ume to the glob­al stock mar­ket, says Lei­bowitz. 

The GameStop episode illus­trat­ed the pow­er of a band of retail investors who were out to prove a point, as opposed to focus­ing sole­ly on turn­ing a prof­it, says Michael Kamer­man, chief exec­u­tive of online trad­ing venue Skilling.

“When there is a moti­va­tion beyond prof­it, par­tic­u­lar­ly in the are­na of a David ver­sus Goliath nar­ra­tive, investors need to pay atten­tion as incen­tive gath­ers momen­tum,” he says. “This new breed of mar­ket par­tic­i­pants is savvi­er and aware of the high risks they are tak­ing. The Red­dit-fuelled revolt that we con­tin­ue to wit­ness as retail traders and investors take on Wall Street is sub­stan­tial. That momen­tum con­tin­ues apace as retail traders con­tin­ue to seek greater access, cen­tral­i­sa­tion and con­trol.”

Kamer­man argues that the scale of col­lec­tive action tak­ing place is a show­case for why retail traders deserve a seat at the table. The coro­n­avirus pan­dem­ic has trig­gered a renais­sance of retail trad­ing and the trend will con­tin­ue to be dri­ven by bet­ter access to plat­forms that enable faster exe­cu­tion and pro­vide com­pet­i­tive prices. 

With inter­est in invest­ing and trad­ing set to con­tin­ue, retail traders will come to make up a sig­nif­i­cant per­cent­age of the equi­ties mar­ket and begin to hold greater influ­ence.

“It has become dis­tinct­ly clear­er that a bet­ter dia­logue is need­ed about why larg­er insti­tu­tions should secure one deal while retail investors may only get a slice of the pie,” he says. 

Ben Hob­son, mar­kets edi­tor of Stock­o­pe­dia, says GameStop illus­trat­ed that a large group of small­er, indi­vid­ual investors join­ing togeth­er could cause a lot of pain for short sell­ers, who had to cov­er their posi­tions. 

“In one sense, Robinhood’s busi­ness mod­el of sell­ing its order flow – the exe­cu­tion of trades that pri­vate investors make through the app – to big bro­kers is a reminder of the say­ing that ‘if you’re not pay­ing for the prod­uct, you are the prod­uct’,” he says. 

“There is no doubt that fees and com­mis­sions are a headache when you are trad­ing fre­quent­ly. But the deba­cle at Robin­hood was real­ly about how pri­vate investors were at the mer­cy of a sys­tem that few of them real­ly under­stood.”

Democratisation of the stock market

While retail pow­er has been ris­ing steadi­ly over the past decade, the real accel­er­at­ing fac­tor has been the pan­dem­ic. Job loss­es, fur­lough, more free time and a need for cash or a will­ing­ness to spend fur­lough mon­ey have all been dri­ving this for­ward. This has skewed nor­mal per­cep­tions of risk and reward, say Mark Gorzyk­ci and Mahesh Kashyap, cre­ators of new stock data ana­lyt­ics tool OVTLYR.

“Under nor­mal cir­cum­stances, when assess­ing risk, peo­ple will pri­ori­tise pre­vent­ing loss over a poten­tial gain. When the pan­dem­ic and result­ing eco­nom­ic shut­down hit, many were put in a posi­tion where tak­ing a finan­cial risk feels like a neces­si­ty,” says Kashyap.

“The coro­n­avirus-induced mar­ket gam­i­fi­ca­tion was large­ly catal­ysed by many people’s loss-aver­sion curves being briefly invert­ed,” adds Gorzyk­ci.

“If you don’t have the mon­ey to pre­vent your fam­i­ly from being evict­ed from your home, the dif­fer­ence between a thou­sand-dol­lar loss and a mil­lion-dol­lar loss is neg­li­gi­ble. On the flip­side, a thou­sand-dol­lar prof­it feels like a mil­lion dol­lars when that’s what you need to keep a roof over your head.”

Rick Eling, invest­ment direc­tor at Quil­ter, says long-term investors should ignore the fren­zied excite­ment spew­ing out of social media plat­forms and online forums. 

“It’s just noise. Focus instead on your own long-term objec­tives and on main­tain­ing expo­sure to a broad­ly diver­si­fied mul­ti-asset port­fo­lio with a clear lev­el of risk,” he says. “These GameStop-style mar­ket play­ers are not investors in the true sense and are more akin to short-term traders.”

Aza­mat Sul­tanov, co-chief exec­u­tive of For­tu Wealth, a Lon­don-based fin­tech, argues that tech­nol­o­gy is a key influ­ence in democ­ra­tis­ing access to finan­cial mar­kets. 

“Where­as his­tor­i­cal­ly an indi­vid­ual investor would need access to a bro­ker, along with any addi­tion­al require­ments that they may have, the rise of dig­i­tal bro­kers such as Robin­hood, Trad­ing 212 and eToro have reduced the bar­ri­ers to entry to a smart­phone and bank account,” he says.

Instead of clos­ing off access to the mar­kets, he calls for bet­ter edu­ca­tion for investors to enable more peo­ple to ben­e­fit from engag­ing in the mar­kets, while pre­vent­ing risky trad­ing. 

“The com­bi­na­tion of instant social media infor­ma­tion with these dig­i­tal bro­ker­ships can and has led to swathes of first-time investors jump­ing on a band­wag­on that is propped up by unver­i­fied infor­ma­tion, with many of these investors over­look­ing due dili­gence in the hope of quick gains,” says Sul­tanov. 

So will social media and group dis­cus­sions on com­pa­ny shares have to be more tight­ly reg­u­lat­ed?

“The role of social plat­forms in build­ing and fos­ter­ing com­mu­ni­ties, be they invest­ing or oth­er aspects of life, is unde­ni­able and a pos­i­tive thing,” says Lei­bowitz at Stake. “I’ve no doubt they will con­tin­ue to play a pow­er­ful role. How reg­u­la­tors will approach those chan­nels as the rise of the retail investor con­tin­ues remains to be seen.”