Editor's Note: This article comes fromMengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Mengyan Finance (ID: Meng-eyes)Mengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.What does it mean for a market to be manipulated?I know there are legal answers to this question, but that's not what I'm really interested in. I'm more interested in where and how, as a bloodthirsty capitalist society, we draw the line between the market itself and the market being manipulated.There are several ways of thinking about the answer to this question. One is the liberal answer to the free market, which tells us that whatever the market is doing must be right; the other is a fundamental, rules-driven approach, which tells us that the market will always (eventually) return to Reasonable multiples of metrics that textbooks and professors deem important. Also, there is a democratic approach, which tells us that the wisdom of the crowd should prevail. I don't know if we should call it wisdom, but this week, the masses definitely prevailed.The huge rally in GameStop stock (and the corresponding pain felt by some of the hedge funds shorting the stock) represents the coup de grace for retail investors in a battle that has been waged for years.Several phenomena are working together to bring retail traders into the market en masse. Trends that have persisted over the years have been: increased availability with entrants like Robinhood; the rise of influencer culture, where one or a few individuals can mobilize their digital following; continued disenchantment with the system (a theme at least crisis dating back to 2008); and the Internet-driven narrowing of the gap between experts and amateurs that has occurred in all fields over the past few decades.In addition, there are catalysts unique to the past year. In 2020, sports betting is closed and casinos are closed. And the one-day drop in the stock market has forced many to question, what are they doing with their 401(k), if not for life? Then came an incredible rebound in the face of bleak economic realities. In a year where people are forced to stay indoors and in front of screens, it’s no wonder that last year broke all new retail broker account opening records.Note: 401(k) generally refers to the 401K plan. The 401k plan is also known as the 401K clause. The 401k plan began in the early 1980s. It is a fully funded pension insurance system established by employees and employers.
The deluge of retail investors and retail money has created a new set of tensions. The relationship came to a head this week when retail investors combined to buy GameStop stock and call options on the Reddit forum WallStreetBets.Behind this forum, the remarkable moves in the stock market have created two camps. Some people say that these retail investors have colluded to manipulate the market, driving these stocks to highs where they should not exist (like Tesla). And the subscribers of this view seem to be mostly Wall Streeters and surrounding media.Still others say the market has been manipulated, particularly by hedge funds who built artificially large short positions in the first place and failed to manage their risk properly. People in this camp tend to ask: why are retail investors not allowed to do this?So why should they really not? After all, if another hedge fund executed the trade and short-squeezed the market, it would just be an ordinary day on Wall Street. The opponent here is a fragmented pool of retail traders, and that's what makes this phenomenon both compelling and controversial. This clearly highlights a double standard.I used to think that the trading floor was no different than WallStreetBets' Discord chat. It is a place of stress, excitement, arguments, collaboration, laughter, name-calling, opinions, inappropriate remarks and jokes. It also has the club-like, in-group feel that online communities often form. The people who work there have nicknames, lingo and their own way of speaking.Think of every description of the trading desk in every media outlet you have come across. People banging on desks and punching screens with their fists; baseball bat-wielding bosses; rolled-up sleeves and dilated pupils; foul language. When Yale-educated, button-down men engage in these behaviors, they become masters of the universe. Yet when anonymous web avatars and high-spirited YouTubers do, they are portrayed as immature, basement-dwelling kids.The double standard here is not just in the behavior and demeanor of these two groups, but also extends to their methods of participating in the market. When hedge fund managers get together to share insights and ideas, it's all in the name of moving toward a more efficient free market. However, when online retail thugs reach a consensus on which stocks are worth buying, they are seen by some as artificially spreading rumors and manipulating the market.So, are they manipulating the market? The past week has highlighted once again just how weird the problem has become. To some extent, you cannot participate in the market without manipulating it. The very act of buying and selling is, in a way, manipulative. Of course, there are more extreme forms: whitewashing, deception, pumping up and selling.Typically these involve some level of privileged access - either to the market at hand or to the infrastructure of the market, but not always. And that's part of the reason why the accusation of market manipulation by retail investors has become so comical. These traders came to the fray with nothing but a Reddit forum and their Robinhood accounts.This is the problem with thinking that what the market does must be right. Market participants are not equally equipped when they walk into the market to fight. The market is not actually free, which means that the market is distorted away from the theoretical optimal pricing. In reality, some participants have access to more capital, more leverage, and more financial instruments to express their views, and this also makes the market is manipulated by default.
