Three centuries ago, the Sephardi merchant Joseph de la Vega wrote the first-ever book on a mysterious, disruptive new invention that was taking off in Amsterdam at the time. His evocative description of the stock market still resonates.
“This enigmatic business which is at once the fairest and most deceitful in Europe, the noblest and the most infamous in the world, the finest and the most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; it is a touchstone for the intelligent and a tombstone for the audacious,” he wrote in Confusion of Confusions, first published in 1688.
All these qualities have been abundant in 2021, which has been dominated by the mayhem surrounding GameStop, a dowdy video games retailer that suddenly found itself playing the hapless, inadvertent protagonist in a Wall Street morality play with wildly conflicting narratives.
While the “meme stocks” mania is now fizzling out a little, some pressing questions remain. What is the wider importance of the GameStop saga, and what does it say about markets today — if anything?
Back in the 1960s the futurist Roy Amara argued that people initially overestimate the short-term impact of new technologies, but underestimate the longer-term effects. So it is likely to prove with the GameStop debacle. Many are wildly overplaying its immediate importance, but we may still be missing its wider significance.
The video games retailer and fellow old-school stocks such as Tootsie Roll and BlackBerry popular on the social media platform Reddit could bounce again, but it seems exceptionally unlikely that they will (ever?) reclaim the frenzied heights they hit in late January.
Despite the regulatory and political scrutiny now being brought to bear, it is difficult to see what will come out of it. Politicians will fulminate, regulators will investigate and the finance industry will prevaricate.
But in the end, it is doubtful how much of consequence is likely to happen. Some parts of Wall Street will have lost money, while others will have made money. Some ordinary investors will have made a fortune, but most will end up losers. Plus ça change.
However, the longer-run significance of the meme stock mania may still be missed. Situations like GameStop are likely to remain extreme outliers, but the saga could prove symbolic of a new era of greater retail influence over stock markets.
The importance of small investors has been gradually dwindling in most developed markets for decades, with periodic manias such as the 1960s “Nifty Fifty” boom and the 1990s dotcom bubble mere blips on a mostly steady downward trend. Star stockpickers, vast index funds, cut-throat hedge fund managers and algorithmic investment strategies have come to rule the market jungle.
Yet everyday investors still control big chunks of the stock market. In the US, households still own 35 per cent of $52tn worth of equities, according to Goldman Sachs. That is more than 10 times the cumulative holdings of hedge funds. Even a marginal increase in the “churn” could have a huge impact.
Why should the trend of a century now be changing? Some reasons: the advent of commission-free trading; the new ability of retail investors to trade fractional shares; cheap leverage from trading accounts with generous credit and easier access to financial derivatives such as options; “gamified” mobile phone trading apps on superfast internet connections; and the herd mentality of the social media age.
Individually these are important, and combined they potentially represent a subtle but meaningful shift.
At some point, markets will suffer a setback, and the new generation of retail investors will lose big. But there are reasons to think that even another bear market might only temporarily dent the shift towards more retail trading.
When the online discount brokerages first emerged and helped fuel the dotcom bubble, most trades still cost about $15 a pop and were conducted over sluggish dial-up modems. Now, teenagers can trade thousands of dollars worth of Tesla options over mobile phones while sharing ideas with friends on Reddit and video game streaming channels.
We are clearly never going to go back to the days of de la Vega, when individuals dominated all stock market activity. Or maybe even back to the 1960s, when dentists, lawyers and accountants were still a force to be reckoned with.
But GameStop could be emblematic of an inflection point for financial markets — where the whims of retail investors might start to matter a little bit more.