If you thought that stability had returned to the stock markets after the unseemly tug-of-war concerning GameStop in January, recent events suggest that further volatility may be just around the corner.
More specifically, GameStop shares have surged once again in May, opening 80% higher last Thursday after more than doubling during the previous 24 hours. However, it subsequently at a price of $147 (from an initial high of $170), with more than 80 million of its shares changing hands during an incredibly short period.
This is likely to see regulators and forex trading apps take direct action, but how effective will this be and is it an ethical step to take in the current climate?
What Types of Measures Could be Put in Place?
The GameStop saga triggered unprecedented volatility in the stock markets, while facilitating huge losses and also causing a hike in the demand for microcap penny stocks.
Ultimately, these shares are particularly risky due to their relative lack of liquidity and the absence of public information, and the organised purchasing drive conducted through online Reddit groups was described by some commentators as a form of market manipulation.
This certainly caught the attention of regulators, while the free-stock trading pioneer Robinhood and Interactive Brokers took immediate steps to curb such activity after the first GameStop surge.
More specifically, they initiated a temporary ban on buying positions in certain assets and microcap stocks, while allowing them to sell their positions if they wanted to.
These brokers also raised the margin requirements for certain securities, in order to create a viable barrier to entry and discourage the type of market volatility that has been seen in recent months.
Is This an Ethical Step to Take?
While not all trading platforms have taken this step (remembering that the issue does not apply to forex or cryptocurrency assets), it’s likely that others may decide to follow suit given the recent volatility in GameStop’s share prices.
Regulators may also choose to get involved in the near-term, particularly if Reddit trading groups and similar entities continue to trigger volatility in specific stocks and price movements.
However, many have pointed to the billions that were lost from hedge funds during the initial GameStop frenzy, highlighting the disparity that exists between large scale, institutional investors and run-of-the-mill day traders.
The argument here is that the disproportionate levels of power and wealth that underpin such hedge funds translate into a form of market manipulation in itself, making any criticism of Reddit sub groups as hypocritical at best. There’s considerable weight to this argument, meaning that the war between amateur private investors and large institutions will continue for the foreseeable future.
Another interesting observation is the coordinated use of social media by Reddit groups to help spot and leverage trends, with this something that’s continuing to impact on trading across a range of markets.
After all, the combination of big data and AI now enables traders to collate and analyse data from disorganised sources such as social media, creating more informed and efficient trades in real-time.