Even as the events surrounding GameStop’s stock were unfolding, the capacity of individual investors to move the market had become quite clear, Campbell Harvey says.
“For years, retail has investor has been marginalized and the market has been dominated by institutional investors, ”says Harvey, professor of finance and researcher at Duke University’s Fuqua School of Business.
“However, I think we have seen a change. The tide is running out and the power of the retail investor should not be underestimated. And we have seen that they can have a significant impact on prices. ”
Media reports acknowledge a Reddit online forum for the GameStop stock move, saying it began as an attempt by individual investors to burn hedge funds that had bet against the video game retailer.
Within days, GameStops stock prices exploded – as much as a rise of 1,700% at one point, as reported by New York Times—And triggered billions of dollars in losses for short sellers.
Harvey compares the group of retail investors that triggered the rise to a “decentralized hedge fund.”
“You have a large group of people – the so-called small retail investors,” he says. “Not all of them can really affect the price. But you put them all together and they can have a significant impact … [they have] the strength of a large institutional investor. ”
With individual retail apps like Robinhood covering as much as a quarter of a day’s market volume, this influence is likely to grow.
However, such “wild volatility” and deviations from a company’s core value raise questions about whether the market will become less efficient, Harvey says.
The popularity of apps like Robinhood also highlights other inefficiencies, Harvey says, because there are so many intermediaries handling each transaction.
It can take two days between the moment a user pushes “buy” or “sell” in the app and the moment the ownership of the share is transferred from the seller to the buyer. This plus all the necessary regulatory activities adds delays and potential problems, Harvey says.
All of these inefficiencies together could push us further down the road to decentralized financial systems or “DeFi,” he says.
“For me, it’s the expected development in economics when you put it all together, and it’s towards a more decentralized way of financing where people interact between peers rather than through middlemen,” says Harvey, who has published recent research on decentralized financing and has an upcoming book on the subject.
A decentralized system is more efficient, Harvey says.
“When you actually execute the transaction, you execute the transaction at the same time,” Harvey said. “There is no delay of two days. So I’m excited about this direction in decentralized finance, and I think this episode is an example of the importance of this innovation. ”
During the GameStop turmoil, brokers, including Robinhood, stopped users from buying GameStop shares, raising legal and ethical issues from users and regulators.
Company calls investors for emergency cash gives cause for concern about how the company calculates risk, Harvey says.
“The surprise to me is that Robinhood did not make these calculations in real time,” Harvey says. “The formula is not secret. I believe that like any basic risk management process, they need to find out what the capital requirement actually is. They were blind and that does not make sense to me. We want to learn more about this, but for me it is very straightforward. It is a failure in risk management. ”
Harvey says the events also shed light on retail investors how brokers make money on their stocks by lending users’ stocks to short sellers, he says. He compared it to letting a rental company rent out your vacation home while you are not using it, but the rental company keeps 100% of the rental income.
“In the future, I think brokers will be required to share most of the proceeds with the owners of the stock,” Harvey said.
Source: Duke University
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