What a difference a year makes. In our wrap-up of 2020, we described the rollercoaster ride that short-sellers had been on over the previous 12 months; dizzying highs, terrifying lows, and fortunes won or lost in a handful of calls. It was a white knuckle ride. But in 2021 – for short-sellers at least – things were about to get much more bumpy.
The role of technology in democratising market access is not something new. For many years, technological innovations have been removing friction and cost from the market, opening up access and improving transparency. But in 2021, these forces culminated to fundamentally rewrite market dynamics. And nowhere was this more clear than in the rise of the memestock trader.
The memestock story began in January when a surge of buying led to GameStop stock rising 700% in a week, resulting in a “short squeeze” – a now well-understood phenomenon where short-sellers caught out by a sudden price rise, have to buy stock to cover their losses, simultaneously pushing the price higher.
In a blog published at the time, we described GameStop as the “first major battleground in an emerging war between individual investors and Wall Street institutions”. We didn’t know how right we were.
What followed was nothing short of a retail trading revolution, with traders organising and targeting specific short positions. ORTEX data showed that, in January alone, short positions on US companies lost $70bn. GameStop and AMC – the original memestocks – became household names. In fact, when Google released its list of top news search terms for 2021, GameStop and AMC occupied positions two and five. The movement, which started on Reddit, quickly spread onto YouTube and has led to YouTubers like Matt Kohrs and Trey’s Trades helping many investors, rising to fame in the process, and appearing alongside traditional pundits on CNBC and Fox Business.
Whether you’re a self-confessed Ape or not, this story matters. For generations, the information advantage held by professional investors has allowed the industry to access opportunities and seek profit where others couldn’t. But the emergence of new technologies is dismantling that information advantage and putting power back into the hands of individuals – it’s a true levelling of the playing field.
Many of the affected companies have taken advantage of the surge in their share price, by strengthening their balance sheet or investing in new opportunities, and coming out of it as a much stronger company.
We’re witnessing this first hand in the success of the companies enabling this new market structure. Companies like Robinhood – appropriately named after the British folk hero who stole from the rich to give to the poor – have, whether you like them or not, seen record levels of growth as individuals try to take advantage of this new, liberated market access. Reddit, where the memestock revolution originated and was organised, also announced plans to go public this month.
The spirit of democratisation goes to the heart of cryptocurrency and blockchain technology too – a market that has also had a record year in terms of valuations and market capitalisation. Here, a desire to remove the need for intermediaries and build trust directly between market participants looks set to reshape markets even further. Indeed, several memestocks are investing in blockchain and cryptocurrency; AMC, for example, has started accepting some cryptocurrencies, is working with movie studios to issue commemorative NFTs and has been considering launching its own cryptocurrency – at least in part, this is a consequence of greater engagement with their retail investor communities.
So, as the sun sets on 2021, there are plenty of reasons for retail traders to remain optimistic, despite what the headlines might say. Market dynamics are dramatically changing, information asymmetry is being eroded, and access to opportunities is increasing – all at a time when market volatility looks set to increase as a result of rising interest rates. It has truly never been a better time to be a retail trader.