Politicians and media are all over this story like a cheap suit. Much change will come from all of this. Here is my rating (high, medium, low) on 8 possible changes:
- Front running by buying order flow becomes illegal; high. This part of the story is easy to understand and as soon as people understand it they ask why it is not illegal. So expect politicians from both sides of the aisle to push this.
- Short Funds will be way more careful: high. Wild overvaluation or messed up strategic positioning is not enough reason to short. As the mantra says “markets can stay irrational longer than you can stay liquid”. This is particularly true when all central banks are in full stimulus mode.
- Some will win in the casino but most will fail: high. We all love a winner story, particularly when it is a David vs Goliath story like this. Sadly this will lead to many more to imitate these winners and most of them will fail. Even on-paper winners on Game Stock GME do not win until they sell before prices come down. This could be like buying Bitcoin in 2017 for say $18k and being a winner when it goes to $20k and a dummy when it crashes to $3k and have to wait years to be a winner again in 2021. Or it could be like Blockbuster ie the story that first brought out the shorts.
- RobinHood fails; medium. During market shocks many brokers fail – look at what happened during the Francogeddon. Read Part 3 to understand the risks brokers face during clearing. RobinHood maybe one of the survivors, but they are in serious peril; the combo of cash crunch and reputation/brand damage is very hard to manage.
- Security Tokens replace legacy equity markets: medium. The key to tokenised equity in the form of a Security Tokens is that they do Real Time Settlement or to be more technically accurate – Concurrent Delivery Versus Payment (DVP). And they operate 24/7 like social media forums. Security Tokens are simply much more efficient than the legacy equity markets operated by Wall Street today.
- Regulation to protect Wall Street: low. Some traditional investors did well. (Fidelity own 14% of GameStop shares BlackRock own 12.3% and Vanguard own 7.6%). Even if regulators are not stopped by public outrage, many traditional investors will lobby to see their competition damaged and feed off the carcass. Watch how Wall Street turned on Lehman Brothers in 2008 to see how this plays out.
- Regulation to make social media more “responsible”: low. The Wall Street Bets forum will be scrutinised by lawyers for collusion. Social media can be used for bad purposes (such as hate speech) as well as good purposes. The Wall Street Bets forum may look good in this scrutiny and lawyers may conclude that it is simply a place to share information with investors making their own decisions. The definition of good or bad is very dependant on your point of view, but it will be hard to raise popular enthusiasm for the idea that the Wall Street Bets forum was created with bad intention and if so how to fix the problem.
- Sustainable democratization of Wall Street via regulation: low. It saddens me to rate this a low as I think sustainable democratization of Wall Street matters a lot to all of us. I rate it a low because regulators tend to listen to lobbyists and because populist politicians will soon move onto the next hot story.
See previous post in this 4-parter.
See first post in this 4-parter.
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