The power of the retail investor is increasing, affecting the way issuers communicate with their investors, how service providers deliver their offerings and how regulators supervise. FIS’ David Lewis examines the implications for securities finance markets
It is said that a week is a long time in politics. For those embroiled in UK politics right now, some would say that the last few weeks felt more like years. Others may be surprised to learn that the debacle around GameStop (GME) was a year ago. The events leading up to the short squeeze have been well documented, and the impact was felt widely by anyone directly exposed to the share price volatility that ensued. But what about the wider fallout, and the trends and changes in market behaviour that it was an early warning of — or perhaps even the cause of?
People love jumping on a bandwagon. Indeed, its popularity is the very definition of the phrase. The GameStop event was a very popular bandwagon both before and after the squeeze. FIS Securities Finance Market Data was showing GME shares at, or very near, 100 per cent utilised for most days since September 2019, and often at that level since 2013.
From 2013 to January 2021, the share price of GME had collapsed from around US$50 to as low as US$4. The volume of shares on loan varied between 20 and 55 million, so exact gains or losses cannot be accurately derived. At a simple average of, say, 37 million, a broad gain of US$1.7 billion could be inferred. Little wonder the Reddit group came after what was perceived to be unacceptable profiteering from a failing business. Pushing the price up as far as US$325 certainly caused some realised and unrealised losses on the short side, but the events of a year ago have arguably led to potentially far-reaching changes.
The newly proposed regulation from the SEC, namely 10c-1, has been examined thoroughly elsewhere but, when combined with other factors it brings such possible changes into sharper focus. GME shares certainly demonstrated some extreme volatility, trading between US$4 and US$325 within six months, and returning to around US$115 more recently. Notably, this is still in the loss zone for almost all, if not all, short positions.
Nowadays, other tech stocks are joining in, if not as wildly. The FANG+ index from the New York Stock Exchange (the big five of Amazon, Google, Apple, Facebook and Netflix plus five more: Tesla, Alibaba, Nvidia, Twitter and Baidu) has fallen some 12 per cent year to date, and is down over 5 per cent over the last 12 months. The indexation of a group like this often hides individual volatility, with the extreme drop in the value of Facebook (now FB or Meta Platforms Inc.) this month recording the largest single drop in value of any US company ever.
FB is not the sole cause of the FANG+ fall. All of the big five are down year to date. For example, Google is down 4 per cent and Tesla is down some 23 per cent since January 1st, so the falling of tech stocks is not limited to one company. The threat of rising interest rates has certainly been cited as a potential cause of the sell off, with money heading for the yields offered by fixed income, but the rise in exchange and private investor activity cannot be ignored.
Trading volumes on US stock exchanges have risen from US$1.37 trillion in 2019, through US$2.20 trillion in 2020 to a high of US$2.45 trillion last year (source S&P Global Market Intelligence, unadjusted for share price values). Over the same timeframe, retail share ownership increased from 13.9 per cent through 14.2 per cent, jumping to 18.5 per cent last year (source IHS Markit).
Such changes, it might be argued, have fuelled the clamour for greater transparency and market access for retail investors — resulting in the proposed SEC Rule 10c-1 — but it has also prompted providers to take note. The power of the retail investor is increasing and affecting the way issuers communicate with their investors, how service providers deliver their offerings and how regulators supervise. The securities finance and collateral industry will also need to adapt. Volatility is certainly good for business, as evidenced by 2020 market revenues, but the potential for structural change must also be considered.
Supervised quid pro quo
Market participants typically and understandably have focused on large clients. Large beneficial owners provide stability and economies of scale while the better capitalised hedge funds and asset managers deliver stable and somewhat predictable demands. However, if the rising trend for retail ownership of securities continues at pace, the market will have to adapt. Lower fiscal and technological barriers will enable greater access across more diverse market participants, increasing the potential for peer-to-peer activity as well as a deeper, broader market for many.
There will have to be a corresponding shift in regulatory oversight at the same time, enabling providers to deliver the enhanced protection that retail investors will demand in return for access to their investments. Technological change will enable access to more participants, with the ability to opt in or out of lending their shares in the same way, so many retail investors can access the cash markets from their pockets today.
There will have to be a supervised quid pro quo, however. Transparency and access will have to work in both directions if the markets are to continue to function properly. Risks must be understood and acknowledged by everyone participating in the financial markets, coupled with the explicit understanding that disintermediation of providers may be attractive when investments are gaining, but the lack of the protective umbrella can hurt when they are not.
The non-objecting beneficial owner (NOBO) is one that permits their information to be accessed and shared. Like any statistical indicator, the inferences and insight gained from those that choose to share their information can only be relied upon when they are proven to be statistically significant. Taking heed of a too-small sample is fraught with danger, as any data scientist will tell you, so the balance must be struck between access and insight, risk and return. Interestingly, the GameStop tag line is “Power to the Players.” It would be fascinating to know if the author had any inkling just how prophetic that line would become when they wrote it.
