THE COSTS INVOLVED FOR MARKET PARTICIPANTS TO MOVE FROM T+2 TO T+1 ARE CALCULATED TO BE IN THE REGION OF $1.8BLN.


The hearing of Feb 18 took place amid frenzied media interest. An almost freakish event, certainly with Roaring Kitty in attendance. Democrats roared their disapproval but not much “got done” as they say, and if there are to be any reforms to the settlement process and payment for order flow it will after protracted reviews and still some years away. The costs involved for market participants to move from T+2 to T+1 are calculated to be in the region of $1.8bln, a clear impediment for any swift action. On payment for order flow (a practice banned in the Europe, the UK and Canada) regulators are likely to err on the side of seeing it as a benefit for equity investors. “IF” this payment arrangement was to be banned it would mean the end of Robinhood as the fees are a substantial share of revenue. But Robinhood could still lose some accounts that did not like being frozen out of the market for days. Civil lawsuits may follow but company websites specifically flag up the risk that the company may restrict access to trade without prior notice. Elizabeth Warren has asked FINRA to probe Robinhood’s suitability but that may not amount to much. And as for those individual investors, surely they are guilty of manipulating markets? How that is proved and how it is regulated is however a grey area – free speech and social media will always be hard to pin down. However a financial transaction tax is already in the offing, opposition to this may now be waning after this episode. No action on short sellers is expected, which is absurd. The short seller fraternity has long been pilloried for some of the tactics that it uses when aggressively shorting companies. Spinning lies about some biotech names has restricted access to funding and therefore in to research. Quite indefensible at times. However, bar some headline risk it would appear that any lasting reform or regulation of the system will be slow or, more likely non-existent.


The consequences for the market in terms of being disrupted are much more profound. GME could be emblematic of an inflection point for financial markets where retail investors will matter more. It has highlighted the power of social media in transforming behavioural finance, whereby the individual makes the common human mistakes of trading, in to social finance where the transmission of information leads to investment contagion that has a tremendous impact on markets. This information it would seem doesn’t even have to be accurate. This is a legacy of Trump. Or maybe it’s always been the case – the electorate has just always been asked to vote on whose lies they believe. Same with Brexit. As long as you have the numbers you win! So no longer are we limited to facts, they are so last decade! It’s not


clear of the rhyme and reason behind how WSB subscribers choose their stocks to attack. I used GME as my example because there is a background story, this didn’t just start on Jan 13. The stars aligned with activism, a massive short and a huge social media mob ready to play in what “was” a reasonably illiquid name. Other stock raids have failed. One of the other criteria was said to be big open interest created in options. This will mean a re- pricing of options in the short term and a move towards a generally higher volatility regime. The short squeeze in GME is an uncomfortable result for those who believe that markets are always efficient and that capital is allocated to companies with the best prospects. It is also a demonstration of technical innovations that since 1975 has saved investors $1 trillion in fees. It is a reminder that other areas of the market are in the process of being disrupted. The bond market, which has a fragmentation issue that is not conducive to being disrupted, has nevertheless adopted ETFs that help with the pricing of very illiquid issues and that are easy to trade. MARKET AXESS an electronic multi dealer to client platform is gaining market share. Art, property and cars can be traded online. There are those who feel that the GME saga was another warning that the market is in a bubble or that people have not only too much time on their hands but too much money to afford to gamble it in stocks. You may feel that his latest retail uprising is a passing fad as in the Nifty Fifty era or the dot com boom. I think it’s bigger than all that – the power of social media is replacing traditional valuation metrics. Financial markets are being Trumpified. Fiction is replacing fact. How and why we own things including money is changing…different values are being placed on assets (GME T-shirts?), something that provides a sense of belonging. FOMO is replacing PE and P/BV. Cathie Wood believes that banks as the conduits of money will eventually be hollowed out. They’ve already given up stock trading – what next will they be forced to give up. Massive things are happening, some good, some dangerous and worrying but they nevertheless seem irreversible.


In the meantime it’s perhaps worth noting that Melvin Capital was up 22% in February and Robinhood announced their intention to list on the Nasdaq on Friday. Meanwhile many individual investors will be nursing losses. Why the fuss? Well, stay tuned.


Lee Heyman E: lee.heyman@admisi.com T: +44(0) 20 7716 8523


25 | ADMISI - The Ghost In The Machine | Q1 Edition 2021


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32