When the bubble bursts, it’ll be a rush to sell and many GameStop holders will end up losing most of their investment. (It might already be happening by the time you read this.) We’ve seen frenzies like this many times before. Tulip mania in the 1630s, the Nifty Fifty in the 1970s, the dot-coms in the 1990s, Bitcoin’s multiple bubbles over the last decade, etc. We’ll see more in the future.
Why are people angry at Robinhood?
Amidst the buying frenzy, Robinhood and other popular brokerage platforms suddenly restricted trading on several red-hot stocks, including GameStop.5 Protests erupted from investors, many market pros (not the short sellers, obviously), lawmakers and more.
Did Robinhood halt trading to appease big investors at the expense of small investors? Did they do it to protect markets from manipulation and liquidity problems? I dislike the idea that a broker can just shut down trading in a security. I think it opens the door to situations where platforms prioritize one investor over another and that’s a massive conflict of interest.
I’m frustrated on behalf of everyone else affected by brokerage outages and difficulty trading. But frankly, it’s pretty wild that a bunch of regular folks with small trading accounts can bring massive institutional investors to their knees.
What are the implications of this frenzy?
There’s no predicting the future, obviously, but I think a few things are likely. Most bubbles end naturally when the euphoria turns to panic, folks start selling, and the price crashes. However, it’s also possible that regulators will step in if they think there’s risk to markets (or they see too many investors getting hurt). I think this ride’s going to end in tears for many folks caught up in it. But I’m not sure who will be crying hardest.
I think markets could see some wild swings and pull back from their frothy highs, but I don’t see major risk yet. I also think we’ll be left with some pressing questions once the dust settles. Will social media traders continue to drive big market moves?
Do platforms have the right to arbitrarily decide customers can’t trade? Are coordinated moves by small investors a danger to markets? Should regulators be watching hedge funds more closely? This is an evolving situation so I’m keeping a close eye on markets to see what might happen next.