For a traditional investor, the past few months have been nothing short of bewildering.
Tomes of business school textbooks and conventional wisdom have been abandoned for what appear to be rampant speculation on assets that would (under normal circumstances) have no value.
To get an insight into just how strange things have become, Netflix (+0.81%) is said to be planning a show to immortalize the events of the past few months in the market, but then again the video streaming company has also been known to greenlight plenty of dicey projects.
One narrative is that an anti-establishment grassroots movement is the core cause of chaos in high finance, the same way as it had been for politics.
But another take is how volatile shares, strutting online traders and (suddenly) cash-strapped brokerages, are all symbolic of a market that is headed for a crash.
Yet both explanations gloss over how technology is being used to make trading free, reimagine information flows and catalyze new business flows.
Whereas in the past, a “hot stock tip” was more likely to be shared on the 7th hole at Westchester Country Club, these days that tip could just as easily be found on a Twitter (+13.16%) feed or Reddit forum.
r/WallStreetBets, with over 8 million followers on Reddit, has invented a new form of financial adventurism – swarm trading – bidding up the prices of obscure firms in late January, they’ve since gone on to silver and cryptocurrencies.
But it’s not just r/WallStreetBets that has been reshaping markets, the real Wall Street has as well – with almost 300 SPACs (Special Purpose Acquisition Companies) listed on stock exchanges last year, raising an eye-watering US$80 billion.
SPACs allow firms to be listed on public markets without the hassle of an initial public offering with their burdensome disclosure and regulatory requirements, and some don’t even have an acquisition target, despite having raised hundreds of millions of dollars.
In the meantime, Tesla (-5.26%) has become the fifth most valuable firm in the U.S. and the most valuable vehicle maker globally by market cap, despite its vehicle production amounting to no more than a rounding error compared to the likes of Volkswagen (-1.21%) or Toyota (+1.70%).
And as pandemic conditions and lockdown restrictions continue to persist globally, a captive audience has sent trading volumes for shares to their highest level in a decade, while those for derivatives have set new records.
The pandemic has made day traders of us all, because when interest rates are so low, any asset can look relatively attractive by comparison.
Compared with the yield on a 5-year U.S. Treasury Bill, stocks are still somehow cheaper than even before the dotcom crash of 2000.
A bigger question is whether the shifting balance of power from institutional to retail investors will be durable, and the Magic Eight Ball seems to suggest that it just might.
For starters, information flows, the lifeblood of markets and the determinants of sentiment are being disaggregated.
Whereas in the past, news about firms and the economy used to come from reports and meetings governed by strict insider-trading and market manipulation laws, now, a vast pool of data is scraped from websites, industrial tracking sensors and social media chatter, almost instantly.
And the barriers to obtaining that information have been dramatically lowered.
What has changed however is how investors parse that data and make sense of it.
Far from a passing fad, markets will be even more intensely disrupted as powerful algorithms aggregate baskets of illiquid assets and price similar but non-identical assets to expand options in the asset trading universe.
And in the coming market scape, it will be those investors who can sift the wheat from the chaff when it comes to data, whether that is done by intuition or artificial intelligence, who will reign in this new age, and it won't matter much if they're retail or institutional investors.
