In-depth analysis: Why the systemic risks of the “WSB trend” may destroy the financial system?

The traditional financial industry is increasingly worried that community members and a large number of retail investors on the Reddit forum will affect the recent stock market. Goldman Sachs executive David Kostin warned that if this situation of sniping on shorts continues, developments may “exacerbate the situation.” In addition, Thomas Peterffy, the founder of Interactive Brokers, also made a similar comment, saying that such systemic risks “in theory can destroy the entire financial system.”

Wallstreetbets trend may “create a snowball effect in the market”

So far, 2021 seems to be a very interesting year. This week a sub-forum called r/wallstreetbets (WSB) on the Reddit forum has triggered a new hot topic. Four days ago, the mainstream media reported many stories about GameStop (GME) sniping shorts. Obviously, this was a victory for a group of “little guys” against Wall Street. Nonetheless, this incident implies that the global economy is undergoing a potential paradigm shift, in which the role of Bitcoin and cryptocurrencies will become more important. However, as the “WSB trend” began to shake up traditional financial markets and penetrated into many other types of stocks, GME was not the only target of intrusion. For example, the Russell 3000 Index (RUA) has become the “target stock” of retail investors, which includes NOK. , GOGO, AMXC and FIZZ.

More importantly, this social media boom has begun to enter the world of cryptocurrencies, pushing up cryptocurrencies such as Dogecoin and Ripple (XRP). According to estimates by Ortex, a financial data analysis company, this short sniper campaign promoted by WSB caused short sellers in the market to lose up to $70.87 billion in short positions. In addition, Zerohedge pointed out in a recent market analysis that Melvin Capital, a well-known short-selling hedge fund, suffered a huge loss of US$7 billion in January 2021, with a loss rate of 53% in the month, while former SAC portfolio manager Gabe Plotkin’s The loss also exceeded $5.3 billion.

On the other hand, the market snowball effect caused by the “WSB trend” also spread to the traditional silver market and related mining companies. On February 1, the most actively traded silver futures contract rose by 9.2%, and the stock price of Australia South 32 Ltd. Soaring 5.1%, Silver Mines Ltd’s stock price soared 49%. The Hong Kong stock China Silver Group’s share price rose by as much as 45% at one time. This wave of frenzy has helped Asian materials stocks become the third best performing stocks in the MSCI Asia Pacific Index. According to a message on the r/wallstreetbets forum, retail investors are likely to push the price of silver from $25 to $1,000.

According to an anonymous financial reporter: “In the 24 hours before the market closed last Friday (January 29), the amount of silver sold by SD Bullion was almost 10 times the amount of silver ounces sold over the weekend. In the normal market In trading, if the market volume exceeds the long position (that is, the number of ounces we expect to sell over the weekend), we can usually find at least one silver supplier/source that is willing to sell some ounces over the weekend.”

In addition, polygon.com writer Owen S. Good (Owen S. Good) reported this week that, driven by meme, retail investors seem to support the rescue of AMC Cinema’s $600 million debt crisis. Meme lords and Reddit community users are actively pushing AMC’s stock price to rise. Owen S. Good analyzed that if private equity companies trade company IOUs into stocks, the movie theater line will gain unexpected vitality.

Sniping short positions is a rare thing in itself, it will cause an avalanche of asset prices, usually in the opposite direction of the investment of large positions. For example, in 2019, when market sentiment was at an extreme low, Bitcoin surged from $4,000 to a high close to $14,000 and chased short orders to completely deplete it.

Even Chamath-Palihapitiya, the founder of the venture capital fund Social Capital and a former Facebook executive, couldn’t help saying with emotion:

“R/wallstreetbets is now the world’s largest hedge fund, and it is a fully decentralized and fully democratic hedge fund.”

In addition, Zerohedge hedge fund analyst Tyler Durden recently studied an investor report issued by Goldman Sachs executive David Kostin. He pointed out that according to the latest Goldman Sachs report, it warned:

“If the sniper shorts continue, the entire financial market may collapse. In the past three months, the most heavily shorted stocks have risen by 98%, surpassing the number of sniping shorts in 2000 and 2009. This week, the WSB trend can be. It can be seen that the domino effect has already occurred, which is likely to cause greater turmoil.”

Tyler Durden said that Goldman Sachs’ VIP list of hedge funds decreased by 4% during the WSB’s short-sniping campaign. David Kostin concluded:

“In recent years, congestion, low transaction volume and high degree of centralization have been scene phenomena in financial markets, which increases the risk of a fund’s snowball effect in the market.”

Tyler Durden explained David Kostin’s final conclusion in another straightforward way, that is, if WSB continues to push the short stocks of short-selling institutions higher, the entire market may collapse.

Interactive Brokers Chairman: “In theory, WSB can destroy the entire financial system”

Goldman Sachs executives are not the only financial giants considering the frenzy of the stock market and the serious consequences that may arise from it. Interactive Brokers Group Inc. (Interactive Brokers) founder and chairman Thomas Peterffy analyzed some of the recent stock market frenzy ideas in an interview with Marketwatch financial writer Mark DeCambre.

According to Mark DeCambre, Thomas Peterffy believes that unless this short-sniping situation ceases, such market actions may continue for a long time, and this systemic risk and trend has the potential to cause “violent fluctuations in the entire financial market.”

Thomas Peterffy further emphasized:

“In theory, long-term sniping on shorts may destroy the entire financial system, and there is no reason why this behavior cannot continue indefinitely.”

At the same time, many members of the cryptocurrency community have been cheering for the “WSB trend” because the WSB’s fight against Wall Street has been virally spread, covering almost all topics in American social media conversations. The total assets under management (AUM) of Coinshares, the largest digital asset management company in the United States, is as high as US$3 billion. They explained the recent turmoil in the stock market.

“In essence, this week’s “WSB incident” involves freedom of speech, censorship, and decentralization. We are witnessing the fastest roll-up of power in human history. As our lives grow more and more The more they rely on digital media, some powerful companies are also capable of censoring our freedom of speech, assembly, protest, etc. The WSB incident is actually an unprecedented power struggle, and what we see is a control. It has already played a role in the political arena, and it is now playing a role in financial markets, financial media, financial technology platforms and social media.”

In addition, on January 29, the cryptocurrency trading platform Bittrex Global revealed that it will launch securitized tokens for all stocks delisted from Robinhood. Tom Albright, Global CEO of Bittrex, said:

“We intend to list all stocks delisted from platforms such as Robinhood so that even small investors have the same opportunities offered to multi-billion dollar financial institutions. We believe that blockchain, decentralization and cryptocurrency will eventually Put retail investors in a more equal position with financial institutions that have been gambling in the market for decades.”

The cryptocurrency exchange also plans to list any mainstream stocks that other financial trading platforms may review in the future. The tokenized stocks currently listed on Bittrex Global include Gametop (GME), AMC Entertainment (AMC), Blackberry (BB), Nokia Corporation (NOK) and Ishares Silver Trust (SLV). However, because Bittrex Global has geo-blocked U.S. citizens who visit the portal, U.S. residents cannot log on to its trading platform to make purchases. The exchange explained:

“Bittrex is regulated in Lichtenstein and Bermuda, so American investors may not be able to trade these securities, but they can also trade these securities in other jurisdictions if they are interested in other regions.”

Author/ Translator: Tae Kon Jung