These fears are overblown. Episodes of prices being driven to wildly unhinged levels due to herd trading by massive numbers of small investors are not new. They are about as common as people who are famous for being famous, the commonly invoked example being the Kardashian family (to which we return shortly).
Unmerited outcomes happen on occasion and are discomfiting because they go against what we believe should happen. However, the overwhelming majority of famous people have done something that attracts fame and likewise most company share prices will continue to be somewhere in the vicinity of arguably reasonable value.
The point is, the salience of the GameStop phenomenon makes it seem much more economically significant than it is. Even accepting this point, some may ask, shouldn’t mass market manipulation, however infrequent, be prosecuted? After all, some unwitting investors are sure to be hurt when GameStop’s price plummets back to reality. The answer is no, it’s not worthwhile prosecuting for at least two reasons. One is the practical issue of identifying whom to charge. The other interesting concern is that proving that GameStop’s price is artificial – a condition for succeeding in the charge of market manipulation – is challenging.
Just as the Kardashians have parlayed famous for being famous into substantive businesses with real value, it could be that GameStop uses its notoriety to raise funds via a new issue of shares and revitalise its business model. The value of GameStop arguably now rests mostly in its fame. Who is to say that its share price is artificial? Sure, the price will fluctuate but it could also stay at an elevated level for much longer than most people seem to expect.
At bottom, the frenzied worldwide attention paid to the activities of a very small fraction of investors trading in a company that is a bit player in the global economy reflects the eruption of a usually contained tension people have about the sharemarket.
Trading takes place in the sharemarket because people have different views on value. Volume of trading is greatest when views on value are most divergent and people are confident their opinion is correct and likely to soon be reflected in price. This is the optimal set of conditions that stockmarkets aim to promote. When prices go beyond the zone that an investor thinks is reasonable and stay that way, they feel discomfited and conclude the market is inefficient and it is likely some fresh hell is imminent.
Given the diversity of opinions, belief in market inefficiency related to particular stocks or sectors is widely prevalent but generally not co-ordinated. Those who believe that, say, Tesla is vastly overvalued are counter-balanced by those who think it is a steal or at least fairly priced. What an episode like the GameStop Insurrection allows for is a set of marginal low-status players – some might call them deplorables – to be clearly identified as driving a change in share price that all the establishment players can agree is based on an unhinged perception of reality.
The tension that the great and the good normally struggle to contain about prices being out of whack can be released with a clarion, urgent call for something – anything – to be done about this egregious instance of market inefficiency and preventing it from ever happening again.
The world is a circus at times. The best thing to do is often just to sit back and enjoy the spectacle. No other action is required, in fact, it could be dangerous. Don’t stop the game.
Raymond da Silva Rosa of a professor of finance at the University of Western Australia business school.
Money with Jess newsletter
Practical tips and information you can trust from senior writer Jessica Irvine to help you budget, earn, invest and enjoy your money. Sign up to get it every Sunday.