Investors took collective action recently as a number of retail investors, organised through Reddit and other social platforms, boosted GameStop’s share price higher by investing en masse into the company. The unexpecting video game retailer became the target of rebellious investors who decided to push back against large financial institutions and hedge funds who were deemed to have too much control over the market.
GameStop’s share price rose to unprecedented highs over the space of mere days but many deemed this to be the result of clear market manipulation.
As the momentum continued, the investment platforms being used for this purpose, namely companies such as Robinhood and Trading 212, took the decision to temporarily halt the trading of GameStop and other related securities.
While deemed an unfortunate necessity by the companies themselves, many argued this went against the entire concept of a free trade market and was somewhat hypocritical.
As the craziness died down, the opportunity to examine the response of these investment platforms, and if they were correct to take the actions they did, arose.
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David Kimberley, an analyst at Freetrade, commented on the long-term ramifications the actions would have on the market in early February: “The issues experienced by most investment platforms have generated renewed interest in the plumbing of the global financial system.
“An important lesson to note is that investors should ask how their investment platform provides share dealing services – digging into the nuts and bolts that make up the processes that follow after you hit ‘buy’.
“Our broader observations: This episode has been a wake-up call as to the power of the individual investor. We’ve seen the huge impact that retail money can have on global markets.
“The big picture here is that the pandemic has accelerated interest in investing. Direct investment in stocks is becoming more popular with the next generations of investors, and we expect this to continue.
“While the past week has been frantic, we’ve found our new customers to be engaged, thoughtful and diligent investors.
“From conversations with these customers, there is a widespread feeling that they like to do things themselves.”
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Charlie Barton, an investments specialist at finder.com, commented on what regulatory changes could be in the works within the investment world: “Hopefully in the fullness of time regulators will be able to look into this and give clarity around what happened.
“Like most things, it’s much more likely that a perfect storm of factors caused the shutdown, including unprecedented system pressure, trading platform’s own liquidity issues, reputational risks, as well as obligations to clients.
“Moving forward, hopefully the system can become more robust to surges, as seemingly everyone agrees that it is not up to the brokers to decide which trades can go ahead.”
Azamat Sultanov, the Co-CEO of Fortu Wealth, both welcomed the accessibility these types of investment companies bring but also warned of their potential impact on uninformed investors: “Technology has helped to democratise access to the 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.
“It’s always fantastic to see new entrants to the sector, and we’re ecstatic that more retail investors have taken the opportunity to engage with the market.
“However, it is imperative that they understand the risks, so that they can make properly informed decisions.”
Azamat concluded: “While it’s certainly true that there are opportunities for some to find great returns through investing in heavily-shorted companies, there is also the very real risk of inexperienced investors losing large sums.
“The combination of instant social media information and 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.
For many, the investment in GameStop and AMC has become a matter of the heart which may result in holding onto investments that prove untenable.
“Instead of closing off access to the markets, we instead call for better education.
“This will allow for more to benefit from engaging in the markets, while preventing against risky trading.”
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