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Long attacks are here to stay

By Jon Hay
28 Jan 2021

Andrea Orcel, the new CEO of UniCredit, may be annoyed to be upstaged by Avalon Penrose, an actor whose hilarious and heart-tugging Twitter video about the GameStop share maelstrom has captured the insanity of stock markets. But these are the frothy markets we live in now.

Investment manias happened centuries before Reddit’s WallStreetBets forum was there to spread tips. Electronic trading isn’t new either, though it has become cheaper, and the use or abuse of derivatives has been a part in any number of wild speculations.

But their interaction — along with a greater flow of free information across the internet — is producing new results. Exactly as social media has revolutionised political life, this cocktail is making financial markets more diverse, volatile and angry.

What is new is the long attack. A retail movement buying shares, especially using leverage through options, can move the price dramatically, especially when the Street is short. It’s the inverse of a short attack, in which organised selling moves the price against the mass of long investors. The effects are steeper, though, since the shorts are themselves leveraged.

The cultural vibes share much with establishment-haters from Trumpists to Occupy Wall Street. Former White House spokesman under Trump, Anthony Scaramucci, has called it “the French Revolution of finance”. But this is less harmful than populist politics — it’s only about the money people chose to punt and knew they might lose.

That does not make it a good thing. Originally, the GameStop longs had a serious point about the company’s prospects. Now no one believes the shares have fundamental upside. It is a dizzying, addictive, empty show.

Ideally, this should be left to burn itself out. But if these events proliferate, affecting more and bigger companies, then regulators will have to act, for example by curbing leverage.

And responsible institutions must not be tempted to ride the momentum. The market’s job of trying to value stocks right is hard enough, without flares of overtly meaningless price action.

By Jon Hay
28 Jan 2021