Is GameStop-Style Risk-Taking a Prelude to Instability?
The last thing the economy needs is the dual possibility of large-scale financial volatility and market dysfunction.
Power to the small investors.
Photographer: Daniel Acker/Bloomberg
Smaller-scale retail investors, traditionally viewed as late to the party and at the mercy of institutional investors, have been capturing stock market headlines recently, directly inflicting losses on hedge funds and influencing the market as a whole. With that comes Wednesday’s striking contrast between the price surge in the handful of stocks embraced by this new investor force and the losses incurred in the overall market — one that also raises several interesting questions for market structure and future financial stability.
Whether the stock is GameStop or AMC, the pattern is similar and played out bluntly on Wednesday morning. A group of small-scale investors communicating through electronic platforms identify and embrace small-cap and heavily shorted stocks. The resulting price volatility gives way to an enormous breakout on the upside. As more investors pile on, short sellers face higher margin calls, with some forced to cover their shorts and others going further and “degrossing” their positions — reducing both shorts and longs concurrently. In turn, this leads to the sale of more liquid stocks, putting pressure on the broader market indexes. As an illustration, this was the price configuration some 30 minutes into Wednesday’s highly volatile trading session: GameStop up 93%, AMC up 217% and the S&P 500 index down 1.7%.