David Gracey

David Gracey

David Gracey

Head of Foreign Exchange and Fixed Income Trading

Currency comment - what happened to the professionals?

·        Events in the U.S equity markets are demonstrating the changing nature, and means of execution, that the market is experiencing every day.

·        Years (decades)  gone by, traders had early access to market news. We would get a headline or story on Reuters (or later Bloombergs) that would only make it into the papers the next day, and as a consequence, the market was fairly closed off to wider influences.

·        However, these days it seems sometimes as if NEWS doesn’t even matter (much).

·         Take the case of “Gamestop” over in the U.S, a smallish retail company that sells computer games (amongst other things).

·         If you haven’t already heard – its share price has risen almost 2000% - THIS YEAR. That’s a 20x price rise since 14 Jan.

·        I guess it must be doing very well on the revenue and income front. Er, nope….in fact, it lost hundreds of millions of dollars.

·        Other stocks have done similar things over the last few months……Avis, ACM, and others. Share price exuberance, when earnings do not warrant it.

·        “How so?” –you may justifiably ask. The answer ….the power of the Internet and the crowd!!!!!

·        In the case of Gamestop, apparently there is a “Reddit” chat group that encourages retail “investors” to gang up against the hedge funds and institute what is known as a “Short Squeeze”.

·        No, that’s not a movie date with the shortest girl in school.

·        It’s when the market senses that positioning in a particular asset is heavily weighted in one direction, and attempts to “squeeze” the price in the other.

o   https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html

o   https://www.nytimes.com/2021/01/27/business/point72-gamestop.html

·        This little story demonstrates how fundamentally different things are now. Today …

o   News is instantly available – to everyone with a data connection

o   Markets are available to everyone – sometimes free of charge.

o   And the crowd can be influenced to act together (legality questions set aside), which moves markets in ways that were incomprehensible a few years ago.

·        And don’t think for one moment that it's only equity markets that are susceptible.

·        You would be hard-pressed today to open a browser or app, and not be inundated with information about FX trading platforms. All of them offering up tales of instantaneous wealth.

·        A trade of 1 million USD in the FX market is not a large trade by any imagination. But 2000 people, transacting in 500 000 USD suddenly means that 1 billion USD is flowing through the market, and that’s not an insignificant amount.

·        Don’t be fooled into thinking that there are not many people willing or able to transact in half a million USD. You don’t need that amount in your bank balance. It’s called leverage, which allows people to trade in volumes far bigger than they actually have saved.

·        The point of this little story is that …markets are no longer the domain of the professionals. Banks, Hedge funds, and institutions. There is immense power in the hands of the retail punter. The internet gives everyone equal access to information and trading platforms.

·        Is it healthy? – I’m not really sure. You can decide that for yourself.

·        It does mean that markets can and will trade erratically for no apparent reason. The old adage of …..” prices can remain irrational for far longer than I can remain solvent”……is never truer than today.

·        Good luck and beware.