3 critical events silently contribute to the GameStop incident

With the recent incident of Game Stop retail traders have come together to up against the hedge fund. We will not be going into the technical part of a short squeeze, options trading and etc., whereas we wish to share some of the critical points that allow all this situation to happen.

No 1: The born of the Internet: 

Today, the internet becomes normal in our life. With the introduction of the smartphone, everyone is connected to the internet every second. Have you ever imagined back in those days without the internet? 

During those years when online trading or buying shares through the online platform do not even exist, we can only buy through phone calls and with a delayed price quote. We almost take it for granted that today we can trade online, freely to invest in the US and European stock markets.  

No 2: Zero commission and fractional shares 

Somewhere at the end of the year 2019, most brokers offer zero commission and allow them to buy fractional shares. We have constantly shared in our community because we feel it is a significant event. In one of our old posts, we posted the topic “The New World of Investment”. If you have not read this post, you may click the link here. https://streetquants.com/broker/the-new-world-of-investment/

This event basically allows everyone who meets the age criteria to open a brokerage account and start investing. It significantly reduces the barrier of entry and that is what the big boys’ objective, to create more liquidity in the market. 

Therefore, nowadays you will often see the price of the underlying more volatile. Imagine this with a population of 1 million people invest just $100, you will get a fund of $100 million.  

No. 3 Market Regulation 

In the US market, traders can short sell the stock. They make money if the stock price fall. Michael Burry is a famous trader to make a fortune shorting the market during the financial crisis year 2008. The GameStop incident has successfully influence retail investors against hedge fund companies who bet against the company. However please be reminded not all market allows short selling.

Now, if there is no internet, the transaction cost is high with a minimum deposit for account opening or purchasing stock is required, and regulation does not allow for short selling then we can safely say it will not happen. The incident of GameStop is not good nor bad but as a smart investor and trader, we do need to take note of what is the pros and cons of it.

The hidden danger of this phenomena

Today the funds are getting more concentrated, the powerhouse is BlackRock (US$8.676 trillion AUM), Vanguard (US$8.8 trillion AUM), Fidelity (US$3.3 trillion AUM), and State Street (US$3.15 trillion AUM). 

Those figures are often too big and difficult to imagine, let’s put them into perspective. The United State’s GDP is US$20.8 trillion for the year 2020, which mean the combined AUM for the listed just 4 firms mentioned above is more than the entire US GDP produce in the year 2020!

We take a look back at the Game Stop incident, are the retail traders win? We would say is a win without the participation of the 4 firms mentions above on the opposite side. Therefore, we always highlight in many articles before that investment is not about winning over others, it is about the focus on YOUR investment objective.

It is never been easier to manipulate the market, transfer of wealth, or orchestrate a recession. That’s why some professionals already actively alerting there will be a bubble burst soon. 

Is there any positive point of view?

In our opinion all these changes are great! Imagine a few situations below:

Situation No 1: Would you rather:

  1. Unable to own any share of a great company like Huawei due to its not a public company or have a capital restriction, or
  2. You can own some of the great company shares based on your available capital. For example, owning Apple, or Google shares with only US100 capital?

 Situation No 2: Would you rather:

  1. Have less liquidity which all currency is pegged to each other, with no or very less movement per day, or
  2. Have lots of liquidity which you can enter and exit anytime with a very narrow spread.

 Situation No 3: Would you rather:

  1. Have a lot of restriction like unable to short sell, or
  2. You can short sell the market

If you have participated in the move of GameStop, congratulations! If you have not, it does not matter as long as you stay focus on your financial objective and able to achieve it. Despite all the crazy events, we feel the fundamentals of trading or investment does not change. We appreciate all the opinions on the other side of the market (for example in GameStop there is a huge amount of short-seller) because that creates opportunity.