“The history of the markets is being rewritten”

The young investors took advantage of the short-selling method used by the funds to punish them. While they gambled that the share price of GameStop would fall, the youngsters just kept buying the stock, which caused the company’s market value to skyrocket. Mammon and Ynet spoke with Yaniv Pagot, senior vice president and director of the trading, derivatives and indices department at the Tel Aviv Stock Exchange and former investment manager of Ayalon, to understand what happened.

What is it to sell in “Short”?
“As you can bet on a stock’s rise, you can gamble, and make a profit, even from its decline. This is a common strategy called ‘short selling’ and is used by many capital funds and investors. An investment body borrows a stock from some entity, sells it, waits for a price to fall and then buys it again. “And returns to the original owners – and earns the difference between the prices. The hedge funds gambled on a negligible stock called a gamestop that deals in video games.”

And what disrupted their bet?
Battalions of young people who started trading on the stock exchange through the Robin Hood app coordinated with each other through the social network Reddit to ‘run the stock’. Demand jumped the share price from $ 20 to $ 460. Hedge funds were forced to buy the stock at a higher price than “They gambled and suffered billions of dollars in damage. In order to finance the purchase of the share at a loss, they had to sell other shares they had invested in, thus intensifying the shocks on Wall Street even more.”

Is this an ideological move?
“The initiators claim that it is. It is a matter of punishing the hedge funds, claiming that over the years they have created distortions in the markets following the same short sales, without working against them to correct the distortions. The initiators’ message is that this era is over and they will operate where funds appear to distort prices through gambling.” On the other hand, by buying the shares you bet on for short, they said.

“Another argument against the funds is that their practice of selling shares of companies in difficulty hurts companies and their chances of escaping the crisis. The sale of shares lowers the share price and the value of the company and thus creates additional pressure on the company – which will now have even more difficulty getting credit from the bank. And customers. “

How do they know which fund shares are missing?
“All stock exchanges in the world, including Tel Aviv, report short sales balances on every paper and the weekly change in these balances. You can easily track and see which papers are on sale in large quantities. “In the United States, there are companies that publish investor recommendations on which companies should be shorted, including the Citron hedge fund, which announced in the wake of the events that it would stop publishing negative reviews.”

The young investors used the Robin Hood app, a digital securities trading system that allows anyone to trade from anywhere at very small amounts, and at almost nil costs compared to the fees charged by banks.

What is the contribution of the new technology to the chaos that has been created?
“The big change is that the app allows you to buy shares. Amazon shares cost $ 3,000, and those who do not have such an amount can not buy one share, but the app groups several investors into one share and allows you to buy shares. Robin Hood and the like allow trading for the first time. “One dollar. This is a dramatic event that is changing world trade and is known as ‘the democratization of trade.’

There was concern that Wall Street would crash if the huge losses of hedge funds continued, so is the phenomenon of new traders at all good?
“There are positive sides, such as an expression of the wisdom of the masses and the fact that there is a balancing force against the big funds. In addition, an opportunity has been created for more audiences to enjoy the stock market and build a basket of coveted stocks for a small amount.”

So where’s the catch?
“The concern is for the small investors, many of whom may like the ideology but do not really understand the essence and can incur large losses. They bought the stock when any sane person knows it is not a company worth $ 23 billion. When some of them want to realize the profits, they are now on Paper only, and will flood the market with stocks when on the other side there will be no one to buy – the price will fall and may cause them to sell at a significant loss.

“Right now young leaders are claiming they do not intend to sell the paper as a penalty to funds, but in reality some investors will want to sell because they will need the money or want to make profits. In addition, the phenomenon creates a risk to financial institutions’ stability that could lead to a chain of dramatic events.” “Large, it could have a negative effect on all trade, and in the end everyone will be affected by the collapse.”

So why did the regulators or the US Securities and Exchange Commission not restrict the running of shares?
“During the week, the frightened clearing houses imposed restrictions on the volume of purchases made by the young people, but on Friday removed the restriction because political pressure was exerted that it was undemocratic. Until now, American regulation sat on the sidelines and the Securities Authority said it was following. The rate of joining of investors. It is scary and needs to produce professional content relevant to this public to explain the consequences. This is what happens when investment managers and investment advisers and professionals are prevented from speaking to the general public – a vacuum is created into which such and other stakeholders enter. Not everyone in this story is about ideology. “

Can it be said that there was a groundbreaking event here, one that would change trade?
“Yes. We can say that we are in an event where the history of the financial markets is rewriting itself. Join here a few factors: The event has basic conditions beyond the technology that made it possible, with both Corona and the transition to work and commerce from home.”

What will happen now?
“We believe that market forces at the end of the day will do their thing and logic will return to trading, and a stock that is not worth its price will reset and reach its real value.”

The sharp declines in Tel Aviv come in the wake of the stormy week in New York that ended in sharp declines. It is the worst week since last October, and the snowball, which began rolling with the flight in the gamestop stock and the younger generation’s broad attack on the financial establishment, is only gaining momentum.

It is estimated that hedge funds have already lost a huge amount of $ 70 billion since the beginning of the year following a jump in the stock prices they were betting against, meaning they would fall in value. In contrast, the young investors connected to them on social media and independent forums have flown the Gamestop stock more than 1,000% since the beginning of the year, and the shares of companies like Blackberry mobile phone maker or AMC cinema network, which were also failed stocks that big funds gambled against.

The question now is whether all this is legal and how exactly it will end. What will happen when the young people who have made a fortune want to realize the profits?

The “hold” calls in the forums try to encourage small investors not to break down, but even Wall Street sharks refuse to give in and help each other with cash inflows that cover losses, sell other stocks to cover losses and thus send the stock markets all to shake-up. In Tel Aviv.