Social Scoring

By Marius-Cristian Frunza
Weekly Briefs

The pandemic outbreak brought an inflow of retail liquidity into the financial markets. Individual investors’ behaviour began to have an impact. Moreover, they are the driving force in several markets, including tech stocks and cryptocurrencies. Is this investor segment in the best position to lead markets? Does their level of information suffice to generate a consistent price signal? Market infrastructures seem to believe that not all retail traders are welcome. TD Ameritrade and Robin Hood banning Gamestop shares’ purchase reflects a potential new trend in the investment industry. Before opening accounts, brokers may assess retail investors against a set of criteria. Will investors make the object of a social scoring?

Based on the recent developments, the answer to the question is affirmative beyond doubt. Cancel culture will enter the world of investment. Social media and other online service providers have already adopted strategy, whereas undesirable users are zeroed out.  Youtube shuts down controversial accounts, Twitter bans “fake news” and Amazon does not provide servers to platforms disseminating “extremist” content. It will be on-line brokers’  turn to filter retail traders based on their social profile.

The Gamestop case speaks for itself.  Small retail investors across the world made “irrational” decisions with the single goal to hammer the last nail in the coffin of a prominent Wall Street hedge fund. Gamestop share became nothing more than a jumping ball in spinning roulette. A stock going from a few dollars to over 400 USD in just 24 hours has all the red flags of market manipulation. This thesis will justify the foreseeable actions of brokerage platforms to filter investors with potential manic behaviour.

What will regulators do? A Texas justice and a Democrat representative asked for an immediate investigation in the Gamestop matter. Financial markets watchdogs will do in-depth diligence over the next week. In the short term, they may find that hedge funds managers colluded with brokers to stop the gloom on their margin call. Regulators could inflict several fines to those concerned. In the long term, they will also review the role and access to markets of retail investors. Undoubtedly, the rhetoric will be to protect individuals from erratic decisions.

In reality, the quantitative easing amid the pandemic made the gate wide open to a revolution led by small investors on the financial market. The voice of the people could be heard through market prices. In academic terms, it is called the price discovery process. What does the market price really say? For sure, it does not tell the economic value of a firm. In these circumstances, price is just a glorified sentiment index.

What will the market be with lesser retail liquidity? Is this the beginning of a bear market?

If you tremble with indignation at every injustice then you are a comrade of mine. >Ernesto Che Guevara, Cuban revolutionary

Market overview

Dow Jones, the leading stock index, lost over 1000 points during the past week. The downward trend was amplified over the last two trading sessions amid the gloom created by the Gamestop situation. The multiplication of COVID variants and the fears about vaccines’ efficiency to combat the pandemic are not encouraging news.

In September, analysts believed that 2021 would be the recovery year, but the start is not promising. 2021 could well be the year of a strong market correction and currency devaluation to allow a relaunch in 2022.

Focus:

Palantir

Palantir’s IPO was a success, and its share progressed into positive territory amid a relatively bearish market. The issues relevant in Robin Hood’s matter pointed out that more traceability is needed in financial markets, especially when dealing with individual investors.

Palantir offers solutions to tackle financial crime and especially to trace financial transactions. Brokers would need to increase their scrutiny capacity over their traders. Thus, the chaos generated by the Gamestop situation could present opportunities for the Denver based firm.

Focus:

Airbnb

The current sanitary situation will massively sever the tourism sector. So why AirBNB’s stock price is thriving? Beyond the quantitative easing effect and the IPO euphoria, there are objective reasons.

First, tourism will not die but will change. The days of huge five stars compounds harbouring thousands of people in the high season are way behind. People will travel but will prefer more isolated places to stay with more customisable features.

Second, the extended working from home changes workers’ habits. A person or a family does not need to rent a palace in a big city anymore, but can easily rent temporary accommodations in cheaper and less crowded towns.

In both cases, Airbnb offers the right solutions.

Focus:

Rise of uncertainty

VIX, the leading volatility index is at its highest point since November, and its level jumped in only a few trading sessions. Gamestop’s case created confusion on the market and fueled the rise of volatility. Moreover, in the White House, the new President is implementing new policies through executive orders, so market investors become more nervous.

The resolution of Robin Hood matter may bring significant shifts in liquidity, thereby increasing most likely the volatility.

Blackberry:

Gamestop reloaded

Blackberry Limited, the leading Canadian company, brought a lot of interest since mid-January. Blackberry’s share goes through a bubble ignited, like in the case of Gamestop, by WallStreetBets community.  

Nevertheless, there may be some substance behind this rally. The Canadian firm sold few patents to Huawei and its sales figures look promising.

Despite some rumours of short-sale positions in the market, Blackberry’s story deserves attention.

Market outlook

As predicted, Bitcoin recovered well and finished the week above 34,000. There are good reasons to believe that Bitcoin will continue in positive territory. The equity market lost its momentum built at the beginning of the year, and there are significant fears about a bearish trend.  The Gold ounce is currently oversold, and the current unrest in the leading stock markets could bring a positive direction in the next quarter.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.