There has been lots of attention around wallstreetbets and the company Gamestop. To read more see here.

The excitement is high in the community as they take aim at wall street firms and seek to topple them. This is clear example of modern day Speculator’s guilt writ large. One user wrote:

“As soon as public trading opens I’m going to liquidate all my remaining boomer stock and buy whatever more I can of GME. This truly is once in a lifetime opportunity”.

There was an interesting piece this week on Bloomberg’s opinion market live blog explaining why this scenario is different to the tech bubble of the naughties. Here is the thinking. Some people think that the moves in Gamestop are not particularly noteworthy because:

  1. This has all happened before.
  2. Retail investors are too small in their size to substantially move markets.

The problem with the GameStop saga

The difference between now and the tech bubble is that retail investors are more sophisticated (talking of a Gamma squeeze) and more leveraged.

Leverage exacerbates the situation

Via the use of leverage small retail bets can be transformed into sizeable ones. By adding these retail bets together you quickly reach high, market moving amounts.

The retail investor can trade options on Robinhood. The total volumes of options hit 7.47 billion contracts in 2020. That is 45% higher than in 2018. A great deal of these options are being traded by retail investors.

The gamma squeeze is a phenomena where as price reaches an option’s strike price dealers will have to be buy more and more of the underlying stock. This has been adding to the woes of GammaStop. Other companies like BlackBerry, Nokia and AMC are also getting pulled in. The race for higher regulation is on. The easy way for this to be contained is that retail traders will be asked to provide more margin for their positions.