News - 17.02.2021

Citi A.M: Day-trading Davids could take on more worthwhile Goliaths than the hedgies

  • FinTech

Some may not agree with the actions of the mostly millennial retail day traders, who together gave hedge funds a bloody nose by coordinating via social media to skyrocket GameStop’s share price, but everyone agrees it is an extraordinary story. 

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People are already talking about the movie – a modern day tale of David versus Goliath with a financial twist. I hope it’s as good as The Big Short. But I also hope we takeaway more from this experience than just knowing we have another blockbuster around the corner on Netflix or Amazon Prime.

There is an important lesson from the GameStop experience. Retail investors are becoming an increasingly powerful part of Western capital markets thanks to the enfranchisement afforded them by technology. The pandemic has only accelerated this trend. When this group of small investors rallies behind a cause, as they did for some reason behind GameStop, they can be highly effective at enacting swift and significant change.

Now imagine for a moment you could bottle that power – the enthusiasm and loyalty these many thousands of small investors showed towards “holding the line” on GameStop – and unleash it anywhere you wanted in financial markets. Where would you aim that power to expedite more positive change?

Some would no doubt like to see more giants of the financial world felled. But why not seek to steer this potential towards an even bigger, more meaningful objective? Through a combination of regulation, incentive, and perhaps some moral appeal, it could be harnessed towards the critical issue of pandemic recovery and building back better.

We know that trillions of dollars in wealth is moving from the baby boomer generation to their adult children. Survey after survey also tells us the vast majority – up to 95 per cent in some polls – of millennial money wants to pursue more sustainable investments. However, when you ask them how many have actually made those type of investments, the picture looks very different.

According to a Morgan Stanley poll in late 2019 only 41 per cent of millennials had invested in companies or funds targeting positive social and environmental outcomes. That figure has likely increased during the pandemic, in line with the rocketing use of retail day trading platforms and declining average age of their users, but the gap between perception and reality is still significant.

Capital markets and financial services more broadly have an immensely important role to play in ensuring we not only defuse the ticking timebomb that is climate change, but also right the social wrongs exposed for all to see by the pandemic – inequality in pay and living conditions, glacial movement in diversity and inclusion, and a lack of adequate healthcare infrastructure.

Governments, central banks, regulators, and many institutional investors are already advanced and further aligning themselves towards tackling these issues, putting sustainable and responsible investment front and centre of how financial markets should operate in the future.

Active asset managers need their Board level diversity criteria met by companies or they will, in theory at least, not invest or vote against re-election resolutions at annual general meetings. Governments are raising green infrastructure funds, issuing green bonds and rolling out sustainable industrial strategies. As part of its recovery plan, the EU Commission has earmarked a whopping €550 billion for green projects, while central banks across Europe are harmonising their green accounting standards.

This is a big and co-ordinated movement between nation states and financial services, and they are making good progress. But the third leg of the stool – the people – is still largely missing. Imagine now adding the power of the many millions of individual retail investors and day traders around the world, who could rally behind, or indeed dump, company stocks depending on their ESG performance. Providing the appropriate oversight and regulation was in place they could hold feet to the fire in a way seldom seen before.

Consumers have already made their mark when they shop, ditching certain brands and products that do not meet most people’s view of fair ethical practice, and in doing so forcing corporate change on working conditions, sourcing, supply chains and emissions. Adding the force of their financial investment decisions would make an even more meaningful difference.

So, when the dust settles on GameStop and people return to their forums on Reddit and elsewhere to reflect, let’s hope they see the potential to turn their collective trading muscle towards something much more critical to everyone’s future. It would certainly make for a happy ending to that movie.