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How activists are impacting the investing industry

Suddenly, investors on social media and tweets from celebrity entrepreneurs are impacting the valuation of company shares. What does this mean for the industry?

Gamestop stock trading

The GameStop debacle was a watershed moment for the investment industry. Suddenly the valuation of shares in a listed company was being decided by a co-ordinated group of investors on social media seemingly gaming the system. 

Tesla and SpaceX boss Elon Musk’s tweets about why people should invest in cryptocurrency and the gamification of investment is changing the way we view profit and loss, with some investors posting evidence of huge losses to forums to gain online notoriety. 

The impact of GameStop

GameStop reached mainstream media and caught the imagination of many people well beyond trading. So-called “activist investors” used Robinhood, the trading app, to co-ordinate a buying frenzy and teach hedge funds a lesson. It was hailed as a turning point when small investors began to reclaim control from institutional investors.

Could it signal the beginning of finance becoming more meritocratic? Many retail investors feel they are disadvantaged in the market and that larger institutions should be held more accountable for their actions. On the other hand, there are those who believe there will always be a two-tier system that benefits institutional investors and brokers, and retail investors are still denied real influence or sway.

“The activity earlier this year around GameStop, AMC and Nokia was an unprecedented time for the markets and definitely one of the more dramatic examples of the power of retail investors,” says Matthew Leibowitz, chief executive of Stake, a platform that allows traders to invest directly in the US market.

He argues that the rise of the retail investor had been happening well before the GameStop situation. For the past few years, retail investors have had greater access to the markets than ever before and are contributing significantly more trade volume to the global stock market, says Leibowitz. 

The GameStop episode illustrated the power of a band of retail investors who were out to prove a point, as opposed to focusing solely on turning a profit, says Michael Kamerman, chief executive of online trading venue Skilling.

“When there is a motivation beyond profit, particularly in the arena of a David versus Goliath narrative, investors need to pay attention as incentive gathers momentum,” he says. “This new breed of market participants is savvier and aware of the high risks they are taking. The Reddit-fuelled revolt that we continue to witness as retail traders and investors take on Wall Street is substantial. That momentum continues apace as retail traders continue to seek greater access, centralisation and control.”

The combination of instant social media information with digital brokerships can and has led to swathes of first-time investors jumping on a bandwagon that is propped up by unverified information

Kamerman argues that the scale of collective action taking place is a showcase for why retail traders deserve a seat at the table. The coronavirus pandemic has triggered a renaissance of retail trading and the trend will continue to be driven by better access to platforms that enable faster execution and provide competitive prices. 

With interest in investing and trading set to continue, retail traders will come to make up a significant percentage of the equities market and begin to hold greater influence.

“It has become distinctly clearer that a better dialogue is needed about why larger institutions should secure one deal while retail investors may only get a slice of the pie,” he says. 

Ben Hobson, markets editor of Stockopedia, says GameStop illustrated that a large group of smaller, individual investors joining together could cause a lot of pain for short sellers, who had to cover their positions. 

“In one sense, Robinhood’s business model of selling its order flow – the execution of trades that private investors make through the app – to big brokers is a reminder of the saying that ‘if you’re not paying for the product, you are the product’,” he says. 

“There is no doubt that fees and commissions are a headache when you are trading frequently. But the debacle at Robinhood was really about how private investors were at the mercy of a system that few of them really understood.”

Democratisation of the stock market

While retail power has been rising steadily over the past decade, the real accelerating factor has been the pandemic. Job losses, furlough, more free time and a need for cash or a willingness to spend furlough money have all been driving this forward. This has skewed normal perceptions of risk and reward, say Mark Gorzykci and Mahesh Kashyap, creators of new stock data analytics tool OVTLYR.

“Under normal circumstances, when assessing risk, people will prioritise preventing loss over a potential gain. When the pandemic and resulting economic shutdown hit, many were put in a position where taking a financial risk feels like a necessity,” says Kashyap.

“The coronavirus-induced market gamification was largely catalysed by many people’s loss-aversion curves being briefly inverted,” adds Gorzykci.

“If you don’t have the money to prevent your family from being evicted from your home, the difference between a thousand-dollar loss and a million-dollar loss is negligible. On the flipside, a thousand-dollar profit feels like a million dollars when that’s what you need to keep a roof over your head.”

Rick Eling, investment director at Quilter, says long-term investors should ignore the frenzied excitement spewing out of social media platforms and online forums. 

“It’s just noise. Focus instead on your own long-term objectives and on maintaining exposure to a broadly diversified multi-asset portfolio with a clear level of risk,” he says. “These GameStop-style market players are not investors in the true sense and are more akin to short-term traders.”

Azamat Sultanov, co-chief executive of Fortu Wealth, a London-based fintech, argues that technology is a key influence in democratising access to financial markets. 

“Whereas historically an individual investor would need access to a broker, along with any additional requirements that they may have, the rise of digital brokers such as Robinhood, Trading 212 and eToro have reduced the barriers to entry to a smartphone and bank account,” he says.

Instead of closing off access to the markets, he calls for better education for investors to enable more people to benefit from engaging in the markets, while preventing risky trading. 

“The combination of instant social media information with these digital brokerships can and has led to swathes of first-time investors jumping on a bandwagon that is propped up by unverified information, with many of these investors overlooking due diligence in the hope of quick gains,” says Sultanov. 

So will social media and group discussions on company shares have to be more tightly regulated?

“The role of social platforms in building and fostering communities, be they investing or other aspects of life, is undeniable and a positive thing,” says Leibowitz at Stake. “I’ve no doubt they will continue to play a powerful role. How regulators will approach those channels as the rise of the retail investor continues remains to be seen.”