AOTW: Reddit Changed the Stock Market Forever, Now What?

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AOTW: Reddit Changed the Stock Market Forever, Now                                            February 5, 2021
What?
Good morning readers,
Quite a green week in market-land, has pushed indices to new all-time highs, and perhaps more
importantly through some key resistance levels which had some strategists a little worried in the
short term (a resistance level is a technical analysis indicator which shows a level the index has not
been able to surpass, meaning as it approaches, it is likely to decrease again as it cannot push past
this resistance level). If the index is able to push through this level and hold these gains, a whole new
level of gains are on the table). Perhaps a little counterintuitive, but we are most cautious around
market highs, so this provides us a little comfort in the short term that these levels were surpassed
and held.

A big story of the week was the crashing back to reality of these “meme” or “social media” stocks
we discussed last Saturday despite the increase in broader equity markets. This should not come as a
surprise, as the old expression goes “whether you pay $24 or $450 for a case of beer, it’s still just a
case of empty bottles after the party” (Editor’s note: I may have just made that expression up, but
please feel free to use it, or tell me to stick to the script!).
Most are aware and understand what happened, but I currently find the public perception of the
whole situation quite interesting, and I am somewhat torn between the benefits of democratizing the
markets as per the Robinhood mission, and the now apparent dangers of this.

Robinhood (the trading app which charges $0 commissions and is heavily involved in this story)
believes that by offering free access to the equity markets to all people (as opposed to only the
financial elite) they are providing a service that democratizes the equity markets and benefits “the
little guy”. I agree this is a fair concept – with compression of fees in the financial industry (largely
precipitated by the advent of discount brokerages) there are not many options for professional
advice for people who would not be considered wealthy. These same people, are likely the people
who need the most help, as they must also plan for their retirement – discount brokerages such as
Robinhood, seem to be a solid solution to this problem. I am all for this when it is millions of
people, independently trading their own accounts – there are certainly risks involved, but over
     Contego Wealth Management | Raymond James Ltd.                750-45 O’Connor Street | Ottawa, ON | K1P 1A4
                            613.369.4600 | Toll Free: 1.866.552.0889 | Fax: 613.369.4699
                                          www.raymondjames.ca/contego

time markets tend to go up, and if these investors can ignore emotion (big if) they should be better
off with this access.

Where I do have an issue, and disagree with the current pundits, is that these individual investors
should not be allowed to work together (unregulated) in a capacity which moves markets. That is
illegal, and jeopardizes the integrity of financial markets which work on the assumption of rational
human beings, and true price discovery. I really do not know how to enforce this, but I also don’t
think it would be unreasonable to have some mandatory coursework/licensing required to access the
public equity markets – a lot of this training is based on ethics, and our industry is very heavily
regulated. When you have these small individual investors working together, the combined assets are
larger than many investment firms – many investment firms full of licensed people, with compliance
departments. Speaking of compliance (who has to approve this e-mail to ensure I am not giving out
any specific stock advice that could be interpreted by one our readers as a call to action to trade a
security – kind of like Reddit users posting comments telling everyone to buy an individual security
without any knowledge of each other’s personal financial situation), the compliance department has
to approve all of our trades to ensure there is no insider trading, front running, or a variety of other
illegal market activity. In our industry, compliance can reject our trades, or limit the purchases of
certain securities. Given how irrational the market was being, was it actually bad for a firm
(Robinhood) to limit trading on a stock which was trading for 20x + what any logical price discovery
method had it valued at? Robinhood is a brokerage who has a duty to protect their and their clients
capital, and maintain the integrity of the equity markets. The actions of their investors were
jeopardizing the investors capital, potentially the solvency of Robinhood (who needed to find a $1
billion credit facility overnight) and the integrity of equity markets. I would argue that not only was it
“legal” for Robinhood to limit trading, but it was ethical for them to do so, and even their duty to
protect the aforementioned parties.

Then there is the outrage about why the hedge funds were still able to trade. The hedge funds
managed by professional portfolio managers, supported by teams of analysts, and a compliance
department were not the ones jeopardizing the integrity of the market. Half of Robinhood accounts
owned at least one share of Gamestop which was trading at prices 20x that of a reasonable value –
     Contego Wealth Management | Raymond James Ltd.            750-45 O’Connor Street | Ottawa, ON | K1P 1A4
                          613.369.4600 | Toll Free: 1.866.552.0889 | Fax: 613.369.4699
                                        www.raymondjames.ca/contego

this was not normal activity by the firm, and (likely their compliance department) realized they
needed to do something about this. If half of Raymond James accounts owned a share of this, and
there was a paper trail of communication between advisors to pump up the price of this stock,
against popular belief, we would in fact all be in jail.

Lastly, a lot of the rhetoric around this was about “sticking it to Wall Street” and the “billionaire
hedge funds”. My comments on this: Billionaire hedge fund is not a real thing… A hedge fund is
made up of investors’ money, and is managed by a portfolio manager (PM). Sometimes this PM
owns the company, sometimes they are a salaried employee who receives shares of the fund as
bonus compensation, but their equity makes up a very small portion of the fund (there are of course
exceptions to this). The money in the fund is the money of investors. Are these investors the
managers billionaire friends? Perhaps, but they are more likely to be the Canadian Pension Plan, the
Ontario Teachers’ Pension Plan, or the 401K of the parents of the Reddit user wanting to “stick it
to Wall Street”. By illegally manipulating the public equity markets are you hurting the wealthy
people who work on Wall Street? Yes absolutely, but to an equal extent you are also hurting every
single person who plans to retire someday.

My apologies for the long-winded rant, but I believe this recent situation has brought to light an
issue which must be addressed. The public equity markets are very important, our society would
collapse if the equity market collapsed. Up until this point, the equity markets have been dominated
by (believe it or not) very heavily regulated, professional investors. Providing widespread public
access to the markets with the advent of discount brokerages over the past decade should be a
benefit. However, with the growth of this segment of market actors, and the ability for them to
easily communicate en masse via social media, this area must certainly be regulated. How they do
that, I do not know, but I believe it is not just I, a professional manager of wealth who is thinking
this right now, but also the father of a struggling family who posted on social media a photo of a buy
ticket of Gamestop @$400 with his last paycheque, who woke up Friday morning to see it trading
@$54.

I do believe access to the public equity markets is a right, not a privilege. However I also believe
financial market regulation is not to protect the wealthy, it is to protect our society. This regulation
must adapt to consider this new found market actor – the individual collective investor.

Over to our friends at the Visual Capitalist for a nice infographic explaining the situation – a reward
of sorts for reading this many words! https://www.visualcapitalist.com/the-crazy-world-of-stonks-
explained/

Enjoy the “big football game” (Copyright precludes us from using the name of this event – thank
you to our friends in compliance for catching that!) being played Sunday in Raymond James
Stadium!

Penned by Kale Wild
Sincerely,

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      Contego Wealth Management | Raymond James Ltd.                   750-45 O’Connor Street | Ottawa, ON | K1P 1A4
                               613.369.4600 | Toll Free: 1.866.552.0889 | Fax: 613.369.4699
                                               www.raymondjames.ca/contego

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