Trading Frenzy

Posted by Vident Financial on 1/29/21 1:20 PM

One of the outcomes of the virus has been the resurgence of retail stock trading. Remember the day traders who stopped working and traded dot-com stocks for a living? Well, today’s day traders are better organized, better educated, with better tools and maybe different motivations.

On Wednesday, a group of investors organized themselves on Reddit to boost the prices of a targeted group of stocks through rapid trading activity. The activity was so high that it triggered about 44 circuit breaker halts in the first two hours of trading on Wednesday as volatility reigned high at cult favorites GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC), Express (NYSE:EXPR), Bed Bath & Beyond (NASDAQ:BBBY), Nokia (NYSE:NOK), and Koss (NASDAQ:KOSS). The facts of the matter -- for example, whether these halts were due to following existing rules or rather a changing of the rules to favor established interest groups against retail investors -- are still in dispute.

The group is being called the Reddit Army, and they organized activity by reviewing some hedge fund short positions and targeting some of their holdings that ended up putting several hedge funds out of business, as they did not have enough money to cover their short positions. And this army trades primarily through a new trading platform called RobinHood. If you haven’t picked up on the social theme here, this is being touted by some as a social justice example of the “stay at home” class against the “Wall Street” elites.

It is getting a lot of attention, including from the White House. The idea is not new. It’s called short squeezing. Investopedia says a short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.

What is new this time is that the squeeze was put on by retail investors. So far, the reasons being touted for regulation are that these retail traders can really get hurt, so regulation is allegedly there to protect them. The Reddit Army is fighting back, saying that the regulators are just trying to protect the hedge funds and institutional elites hurting the “common guy.” Another line of thinking that is emerging is if the Reddit Army is the newest version of “Occupy Wall Street,” trying to punish the wealthy hedge fund managers. It is leaving multiple questions for regulators, lawyers, and the political class to sort out: Should hedge funds be able to leverage their shorts on a company without restriction? Should mob trading be allowed?

One thing that is apparent of late is that certain stocks’ and cryptocurrencies’ prices are not reflective of the underlying company. Prices are being set now based on what the traders are thinking the next guy will pay and forcing reluctant buyers to buy.

We believe that having managed funds for investors who are looking to meet their long-term goals requires not only growth, but also risk mitigation. Our takeaway for our funds is that the principle of inherent value is especially important in moving into a long-term investment. One of the risks for long-term investors is overpaying for an investment. In our opinion, there are a lot of companies that are pricing in too much speculation for investors. This latest trading frenzy illustrates the reality, with stocks like GameStop trading between $20 and $400 in the last 30 days.

Markets can be used by both short-term traders and long-term investors. Do not confuse the two. We believe in having a good value factor that considers the intrinsic value of an investment to not be on the wrong end of a trade.

Topics: Market Drivers, Principles-Based Investing

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