The house loses very seldom in a casino.
That’s exactly what happened on the stock market in January when ordinary investors turned the tables on the pros.
Droves of investors using an online forum in a platform called Reddit connected over a few weeks and caused the price of at least three stocks to soar close to the sun and burnout.
The stocks included GameStop, a retail chain selling video games and consumer electronics that suffered a 30 per cent loss in sales in the most recent quarter, even with near tripling of e-commerce sales
That made GameStop a candidate for a process known as short selling. In short selling an investor firmly believing a stock price will go down borrows some stock and sells it. The short seller cashes in when the price drops and he buys the stock back.
Or loses when the stock keeps climbing and he must buy at a higher price to cover the short sale.
GameStop, like Canada’s Blackberry and U.S. cinema giant AMC, was on the skids — a perfect candidate for short selling.
The online Reddit connection by thousands of ordinary investors sent GameStop’s price into the stratosphere.
Priced at $11.64 US in November and expected to hit $13 within a year, GameStop price hit an unbelievable unsustainable high of $343.54 on Jan. 27.
That’s when the brown stuff hit the fan.
Large investment funds called hedge funds had made gigantic bets on GameStop’s price falling, as the little guys competitive market power pushed the price up in January, hedge funds became nervous.
They covered their bets by buying the stock back at higher prices than they sold it. That drove the price even higher.
The hedge fund losses are estimated at $30 billion. One fund lost 53 per cent in value. The cozy game of short selling by hedge funds had been upset.
When the casino tables are turned on the house, the house usually changes the rules.
The online platforms were used by thousands of ordinary investors — most of them inexperienced in investing in stocks. They turned the tables on pro money managers. Reddit shut down selling the next day under pressure from authorities and market agencies.
That action gave the big boys an opportunity to cover their shorts without getting killed even more. Possible collapse of many hedge funds and the market was also avoided.
The trading restrictions were lifted the next day after a flurry of lawsuits were filed. The prices kept rising.
The situation shows how the “free market’’ works when one segment organizes.
And this event provides conspiracy theorists with evidence that markets are almost rigged by herd mentality, if not collusion, of hedge fund managers. Bets by hedge funds help drive prices up and down.
Still, it’s hard to believe that no sophisticated adviser also played a role in this plot.
Millions were made by the naive little guys organizing and pulling in one direction. Millions will be lost by these little guys when the bubble they created bursts.
The Reddit investors interfered with the hedge fund process and its profitability. The concentration of large funds since the re-birth of mutual funds in the 1950s had almost destroyed market power by the small retail investor. As much as 80 per cent of U.S. stocks have been held by big funds.
Now that retail investors have discovered their power markets may never be the same. We can expect more bubbles until the big crash arrives.
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NOTE: The Bizworld column about dynaCERT should have said the City of Woodstock is only trying the technology to reduce fuel use and greenhouse gas emissions.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
