the genesis of meme stocks and pack trading

Stock market event of 2021, the meme stocks are stocks that go up apparently for no reason… Except that some investors, gathered on discussion platforms like Reddit, share good tips: buy, it can only go up!

Thanks to government checks issued by way ofhelicopter money and trading platforms like Robinhood, the year 2021 has seen the great landing of American retail investors on the stock market front. In February 2021, the volumes traded by retail tradersas English speakers say, were multiplied by 10… compared to only two years earlier!

As if that weren’t alarming enough, you can find everything in this audience… and especially anything.

Ever younger… and more irresponsible investors

In May, we learned that an American broker, Fidelity, was not only going to provide debit cards to teenagers, but also allow them to trade. Rest assured: the sign concerned promises that this will be done under the “control” of the parents.

May 18, 2021: “ Fidelity will allow young people aged 13 to 17 to trade stocks and funds, but will allow parents to control their activity. »

Why worry, since the financial media are constantly highlighting young prodigies of financial analysis?

February 9, 2021: “A young South Korean investor making 43% gains becomes the new icon for retail investors. »

While we’re at it, why not trade after drinking a little too much alcohol? What could go wrong?

August 22, 2021: “If you’ve ever jokingly wondered if ‘investors’ who bid on stock type stews or frauds same were drunk or not, the answer is apparently ‘yes’. 59% of Gen Z traders admitted to trading while intoxicated, according to this survey…”

But that’s not all.

To hell with buying on margin: let’s take out loans to buy stocks!

A well-known technique in the trading world to increase your level of leverage is to switch from a classic trading account to a margin trading account. It is then a question of buying financial assets not by mobilizing all the necessary capital, but only a fraction of it (the margin) by borrowing the rest (the margin debt – margin debt).

Rather than making this type of agreement with your broker, as is traditionally done, another solution consists in turning directly to your banker in order to borrow a sum of money to buy financial assets.

This is precisely what many of the zooms (born after 1996) and millennials in 2021. A survey dated April 6 by the MagnifyMoney site shows that, in the United States, 80% of Generation Z investors and 60% of those of Generation Y have taken on debt to buy financial assets, the investors of all generations having opted for a personal loan in 38% of cases.

However, a personal loan is precisely the type of loan on which – in any case, if you contract it in France – it appears in red capital letters that you can use the sum borrowed to buy everything you want… in with the exception of financial investments!

Individual investors have therefore not only invested a large part of their savings in the financial markets, but, for at least some of them, have also taken on debt with their bank in order to invest even more…

Good.

But where did this money go?

GameStop: when the first meme stock inaugurates the gamification of trading

As Lyn Alden recalled at the end of October:

“When there is a shortage of good money (in this case, via persistent negative real rates), people have historically tended to speculate.
Most of the things they speculate on unfortunately do not retain purchasing power over the long term. Those are
memes…until it doesn’t no longer the case. »

With the actions samewe are taking a further step in the “gamification” of trading. Through the explosion of meme stockswe are dealing here with short-term raids initially organized on internet discussion platforms (like Discord or Reddit) where we hunt in packs in an atmosphere of generation war, without always knowing very well what the ‘we do…

February 2, 2021: “There are people on Reddit asking where they can buy physical uranium. »

… but with a very simple watchword:

February 2021: “We can stay retarded longer than they can stay solvent. »

As the site reminds eToroit all started in January 2021:

[Lorsque] the American chain of stores selling video games GameStop (GME) soared 1,900% in less than a month, powered by Reddit forum r/wallstreetbets and other retail investor communities.

This incredible rise humiliated a number of professional hedge fund investors who had aggressively positioned themselves by betting on falling share prices, and it highlighted the growing power of individual investors who do not want to no longer be the eternal losers in the financial markets.

GME’s share price then fell around 90% almost as fast as it rose as retail investors moved on to other stocks. »

In doing so, the most naive participants in this great pyramid game ended up with accounts displaying the deepest red.

GME courses between January 26 and February 9, 2021

In terms of the number of participants (therefore collateral victims), we are not on the thick of the line, since no less than 9% of Americans bought GameStop shares in January 2021.

That is to say how much the United States is the trading nation…

This reversal of hedge funds short sellers by this generation of “Covid traders” did not stop there. Wall Street’s rebellion against Main Street continued on other grounds.

We have witnessed in 2021 a plethora of other stories of players having succeeded in outdoing the barons of Wall Street by raising the price of meme stocks to outflank short sellers.

January 28, 2021: “American Airlines is jumping after a discussion on Reddit about a raid on the shorts. »
“The stock market has become a video game…”

With these raids and this “memification” of trading, we have somehow witnessed the birth of the first hedge fund

July 31, 2021: “YARDENI RESEARCH. Has the stock market turned into a video game? Instead of playing Call of Duty, GameStoppers are playing Tighten the shorts. These social media populists have taken over Wall Street. They have nothing to do with fundamentals…”

Obviously, this does not please everyone, some hedge funds having been forced to liquidate their positions to respond to margin calls… sometimes even going bankrupt.

Drawing of Salt Lake Grandstand

If it is characteristic of the phase of mania in which the markets find themselves, the advent of hunting in packs on the meme stocks will have at least been beneficial in that it will have unveiled the crony capitalism in which central banks have bathed us since the first quantitative easing American 13 years ago, in November 2008.

Some big fish, too used to playing without ever losing, protected as they are by the big monetary planners, have finally been confronted with the return of market forces.

But, in 2021, retail investors also enjoyed themselves in market segments in which baby boomers of Wall Street are much less present, I named the same corners.

I will tell you more about it in my next post!

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