FX and democracy! Reddit groups now forming the future of trading as whole industry reacts to WSB crew
The really interesting aspect is that when retail traders crowdsource and attack a stock for political motivations, you cannot b-book because they will beat you!
Who would have thought?
Back in 2011 when Reddit, the discussion board for absolutely every subject worldwide, began its Forex category under r/forex, that the entire global electronic trading industry would form its future policy based on the dialog between members of the public who post their opinions, experiences and perspectives on public forums.
At that time, the potential was absolutely evident, but often overlooked. When a Reddit user picked up a particularly interesting story or observation from the FX industry news sources and posted it on Reddit, it was read exponentially by the community and unique visits to that particular article were disproportionately high.
This should have perhaps served as a precursor to what would lie ahead once the entire trading world and its providers begin to look closely at what is being discussed on Reddit.
Last week, GameStop had been singled out by professional short-sellers as a business with a limited future. They reasoned that gaming is increasingly conducted online and that the distribution of games would follow suit, rendering GameStop’s bricks and mortar retail operation obsolete.
That might have been the end of the story had one of the short-sellers, Citron research not published an article outlining their thesis.
That article was picked up by WallStreetBets (WSB) which is a Reddit subgroup, many of whose 5 million members are of an age group that held GameStop in high regard. They took apparent exception to the idea that professional investors were trying to directly benefit from the demise of a store, that many of them had regularly shopped in.
Their response was initially to start buying GameStop shares and then options over the stock. Many WSB members were also owners of commission-free stock and option trading accounts and it wasn’t long before the GameStop buying took on a life of its own.
GameStop’s shares skyrocketed as result. Rising as much as 1360% in a matter of a few days, The companies market cap moved from a few a hundred million dollars to more than $13.0 billion.
A Korean hedge fund that had invested a few million dollars in GameStop long position in March 2020 was suddenly sitting on nine-figure dollar profits, needless to say, they cashed in.
Importantly, now that almost a decade has passed since Reddit began to host a small and little used forum for retail FX traders who discussed EAs, brokerage reviews and technical analysis, what must be borne in mind is that the entire demographic now using Reddit has progressed ten years.
Today’s users are those who were 10 years old when Reddit’s r/Forex forum came about. They are the post-Millennials. My own children’s generation. Those who did not just grow up with computer science, social media and being able to code home-made applications. They were born with it.
My elementary school age children are able to program their own software, build and configure solutions for everything from IoT to speech recognition for everyday purposes, and understand every aspect of computer science that only professionals with years of expertise did ten years ago.
Ten years is a lifetime in the progress of modern demographics, and is a lifetime in the development of FX.
Debate in the FX industry about regulations, marketing and government-led reforms has dominated for years, however not much advancement has been made despite the huge cost of implementing new solutions to meet ever changing regulatory requirements, and the tug of war between clients, regulators and brokers continues.
FX industry experts have all seen it many times.
The dubious practice in which companies whose core business activity is providing services, be they liquidity, brokerage solutions or market integration services to retail FX brokers and then open a retail FX brokerage with an MetaTrader 4 off-the-shelf solution under a different name.
This is a classic case of conflict of interest, as it positions a vendor in direct competition with its own clients, as well as giving them a potential edge over their own clients due to the access to brokerage databases, business models and customer pipeline which could easily be fed to their own retail entity, which under a different name and jurisdiction, would likely go unnoticed by any regulator or unsuspecting brokerage which entrusts its valuable intellectual property with its vendor.
FinanceFeeds has gone into huge detail about this matter for many years, yet the conflicts still prevail, however when a group on Reddit now says something, everyone stops and listens.
Perhaps we are entering the long awaited age in which the people decide what happens next, and in which social media replaces due process.
The WallStreetBets Reddit group readers have had a bigger impact on the world than the 70 million people who voted for Donald Trump in the US elections, because 75 million voted for Joe Biden. Perhaps social activism may supplant democracy.
We have witnessed the first time in history that Reddit has definied financial markets policy. Clearly, targeted social activism has more impact than voting via a traditional democratic process. It is micro-targeted and very specific. For example, Millennials investing ethically has now become a major feature, and even the banks, hedge funds and institutional giants are racing to see how many can launch as many ESG (green) product ranges as possible.
The WallStreetBets crew have effectively politicized micro-investing and created activist micro-investing. Established brokers are perhaps not ready for this dynamic, and we saw the dichotomy at the end of last week when clients were shut out of their platforms as a direct result.
Once again, this all points to the necessity for brokers to go fully toward a multi-asset product with fractional resources and a good quality mobile application. They need a purpose, which is not purely focused on straight out money making. Perhaps a new paradigm.
The really interesting aspect is that when retail traders crowdsource and attack a stock for political motivations, you cannot b-book because they will beat you! This is what has happened to Citadel Securities, one of the world’s largest non-bank market makers.
It is the view of those in the know that ESG investing is the future, because it is not about making money, which is increasingly a difficult thing to do, therefore if people power is the new way ahead, we are onto something as we begin investing to change the world.
FinanceFeeds spoke yesterday to a senior executive at a FX brokerage in Central Europe. He explained “There have been a series of conversations on Reddit that everyone from regulators to large brokerages have begun to take so seriously that opinions from users are forming boardroom conversations.”
“Apparently eToro enforce stop losses on clients trading GME. A bit of volatility and you get stopped out. They hid buttons to change the stop loss according to users on Reddit, with huge amounts of commentary and readership directed at it” he said.
“It’s refreshing to watch the media blatantly and brazenly lie in peoples faces about a different topic, and everyone is talking about it. It is not so much about running a b-book. It’s running an investment firm while not knowing how to run an investment firm.” he said.
He said “I don’t use any social media, apart from Reddit which is the only source that shows me things I want to see and less of what they want me to see. The great things about Reddit is they have moderators in each subredit who represent the values of the subreddit” he said.
“Just like Twitter, Reddit is also plagued with bots, but at least they can be downvoted and you’re less likely to see them” he said.
Thus, it is clear that nowadays, senior executives within FX firms are of the generation which cares hugely about social media, opinion and uses forums for formulation of policy.
When everyone is out of touch, the democratizing effects of forums are there to keep things in check, however as we saw last week, they are also able to shape the entire direction of financial markets.
Here’s to people power!