News & Analysis

In a world of influencers, the influential will flourish

Andrew Saks, Wednesday, 1 September 2021

The entire scope of the electronic financial markets has become a hotbed of influencer-driven discourse, volatility, and evolution recently.

Whilst the mainstream media has focused on the sensationalist aspect of the sudden change in the way many markets are driven and engaged in fear-mongering by using phraseology such as 'unprecedented volatility', 'short squeeze' and even 'flash crash' to describe some of this year's new-on-the-scene events such as the beginning of the meme stock phenomenon in January this year and the rise of the Reddit board traders, as well as to describe Elon Musk's hobbyish twitter escapades which have wiped a trillion off a market and put it back on again at the stroke of a keyboard, it's worth stepping back and seeing this for what it really is.

The future.

There have been changes in the method of trading, investment and the structure of electronic markets in the past, and they have been regarded as progressive. Nobody baulked when the noise of the open outcry pits gave way to server rooms and quadruple screens, and the subsequent replacement of the 'barrow boys' with broad Essex accents with computer science and applied mathematics graduates from Oxford, Cambridge and UCL.

The arrival and immediate impact that the social media influencers on Reddit and Twitter has had is just another evolution in the modernity of trading.

Of course, there have been some reactive measures. TikTok, which is perhaps the world's most popular platform for influencers, has decided that it is going to take a dim view of any FX and CFD related activity and has banned influencers from using its platform to talk about the financial markets. Whether this is in the interests of users - doubtful - or whether it is because TikTok is a Chinese platform - likely - is open to debate.

A year ago, Reddit users began to look at this. As the saying goes, "be fearful when others are greedy and greedy when others are fearful". TikTok then contained hundreds of accounts of kids giving advice on trading, and the top Reddit user back then said "I'm really learning towards getting out of the market for a while. This feels like the epitome of the shoeshine boy giving stock advice."

121 comments ensued!

Just a few months later, the Reddit boys got into their stride, and began influencing the GameStop stock prices, creating waves of volatility that were long lacking from the market.

Whilst the mainstream news bore down on this trend, the traders relished it. FXCM founder and CEO Drew Niv back in 2011 said "This market has had no volatility for two decades". Now here we are ten years later, and apart from the occasional blip such as the 2015 Swiss National Bank's removal of the peg on the EURCHF pair which sent the currency markets into instant volatility.

So much designed around an over-the-counter market of no volatility was the whole retail trading industry that this sudden volatility caused some brokerages to go bankrupt, exposing them to negative client account balances that could not be recouped, and even some banks to be hit for non-repayable negative trading account balances.

Governments and regulators got up and raised a few eyebrows, curtailing leverage and making more steps toward ensuring that the electronic trading world remains geared toward low volatility.

But it's volatility that people want, and they are prepared to create it themselves by becoming influencers.

Today, the Reddit influencers have moved their attention to other 'meme' stocks, with favourites remaining AMC Entertainment and GameStop, the short squeeze in January having demonstrated which brokerages had the mettle to cope with volatility and which ones did not.

Those who did not locked their clients out of their accounts, an activity that I have taken a dim view of and have been publicly vocal about it. My view on it can be seen here:

(insert video) https://www.youtube.com/watch?v=KgMe6jElrG4

ETX Capital demonstrated its resolve with aplomb at that point, allowing full trading to continue during the GameStop short squeeze with absolutely no requoting, no slippage and with full and uninterrupted access to trading platforms having been provided as normal to all traders.

It is not enough to build an electronic trading company purely on the premise of a low or zero volatility environment. The Reddit influencers have shown the world they want volatility.

The SPAC listing phenomenon that has allowed new upstart companies, some of which have not even produced one product, to bypass all the criteria required by major stock exchanges and in some cases get $1 billion raised and begin trading with stock that varies in price rather than remains steady as the accountant-led, due diligence-orientated premium stocks on the blue-chip indices do.

Citadel Securities, one of the most popular non-bank market makers in the electronic trading industry which could not cope with the volatility during the January GameStop 'short squeeze' yesterday attracted attention after Maria Nikolova, one of the most respected FX and electronic trading industry reporters pointed out that the company had approached the court in order to put an end to any allegations of conspiracy during the GameStop 'short squeeze'.

Citadel Securities, along with many other large and small brokerages and market makers, is part of a class action lawsuit and Ms Nikolova's report which stated that Citadel has explained to the Florida Southern District Court that the unprecedented market volatility impacted brokerages in different ways and led market participants to take different actions in an effort to address the impact of the volatility.

Clearing agencies which do not appear in the lawsuit imposed extraordinary capital requirements on brokerages, including defendants in this action, consistent with SEC regulations and designed to mitigate risk in volatile markets, according to Citadel. These sudden requests effectively required those brokerages to post massive amounts of capital (including more than $3 billion for one defendant) with only a few hours’ notice.

Ms Nikolova's report attracted the attention of the Reddit traders and went absolutely viral.

Where there is smoke, there is fire. Traders are relishing this new self-empowered direction of being able to influence the markets, and the market makers, electronic brokers and clearing houses need to up their game and give it to them.

With head held high, ETX Capital's 5000 instruments remained fully tradable and the platform fully operational during that period. We live in a world of influencers. The age of self-empowerment is here.

It should be welcomed and considered part of the future, not resisted against to the extent of alienating traders and ending up in court.

We can all participate in a future that includes everyone. Let's call it democracy.

 

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