Market Democratization or A Fool’s Errand?

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Remember years ago when a group called “Occupy Wall Street” set up camp on……..Wall Street……..and were going to “democratize” the banking industry? Remember loan decisions were going to be made by committee by wiggling their hands either up or down for approval? Very cute but not a very practical business model. Well, looks like “Occupy Wall Street 2.0” is alive and well and taking on the financial markets this time. Once again, very cute but this time there will be pain. Lots of pain. Attempting to change banking didn’t cost the “occupiers” anything (’tilit got to cold to occupy and cold meds went through budgets) BUT toying with stocks. Uh oh!

So fast forward to NOW! A new generation of “occupiers” has arisen and are reeking havoc in the financial markets. Oh, and they’re smarter, too (sort of). No more sitting out in the cold. Oh no. To “democratize” financial markets all you need is a Robinhood account (no trading commissions even, wow), access to a Reddit chat room, a federal stimulus check and you’re all set. AND, it can be done safely inside a warm room out of your house/home (think of how much is being saved on cold meds). Then you collude with fellow Reddit “chatters” to choose a ripe stock target with a large short position (like GameStop……for a start) and buy, buy buy. Way too easy, right? Ah, maybe for a while.

Let’s take a look under the hood of this bright red “democratized stock market” Ferrari. First, just WHO is leading this clever strategy in Reddit’s WallStreetsBets forum? Suddenly a random person shares a trading idea with other random strangers and drives a stock (GME) up 1,600% in a few months? Who bought first? Lead “chatter” number one buys, tells “friends” and then sells higher. I believe that is referred to as “pump and dump”, if I’m not mistaken. It’s like the movie “Wolf of Wall Street,” which was based on a real story, by the way. So, did anybody ask who that first buyer was? Asking for a friend.

Well, now armed with that first success and tons of media coverage, mobs of “democratizing rebels” flocked to Robinhood to open accounts to get ready to “take it to the man” (hedge funds)…….and get rich. OK! We “the people” have changed Wall Street and the evil hedge funds forever. OK! What could possibly go wrong? Possibly a couple of things. One, spreading rumors or manipulating markets is kind of a no-no. Obviously the regulators will be all over this. Could Reddit be complicit? Could Robinhood have a serious problem with customer suitability rules? Could Robinhood be the ultimate short? Again, asking for a friend.

So, what happens when the “uninformed” investor, or “uncool not in the right chatroom” market participant buys GME at $400 only to wake up after a day or so and sees GME is now $90 (and falling). Or, seeing all the easy money, someone in Reddit’s WallStreetBets forum targets another “sure thing” but it fails? The “occupiers” and “democratization players” fade away and enter Elizabeth Warren with an army of regulators. Game (no pun intended) over.

Remember, “a fool and his/her money” is soon parted. Unless you are one of the first in.