In May 2010, 1 Trillion dollars of American companies’ value wiped within 5 minutes. S&P500 index was down 6% without an apparent reason. Authorities couldn’t find the cause for a very long time. 5 years later, they have found out that it was caused by an individual trader from the North London trading from his bedroom, named Navinder Sarao. He did not use expensive algorithms as the Wall Street does. What he did was to give millions of sell orders for an already falling market and through canceling them before they actually happen, causing the market to fall with a speed that has never seen before. Mr.Sarao manipulated the markets intentionally, which is not allowed under the US laws. The motivation of him was rooted to the high-frequency trading of Wall Street, which is basically using computers to trade very frequently and make tiny profits out of massive numbers of transactions. When Mr.Sarao was sick of losing money to the computers of Wall St., he decided to beat them, through an algorithm of his own. Through his bedroom in his parents’ house, he managed to beat the biggest players of the world’s second largest market, causing a sudden crash, which took its place as the “Flash Crash” in history books.
After this incident, Navinder Sarao became a rebellious figure popular among the individual traders, who have been trading in a market in which individual investor almost never has such an influence.
Fast forward to 2021, Gamestop, a brick and mortar video game seller, had already been losing value, due to the consumers choosing to shop online more and more every day. The excessive amount of short calls by the hedge fund managers drive the stock price to a point of which was considered to be too low by some Reddit users, and a Youtuber called “Roaring Kitty”. The subreddit r/wallstreetbets community believed that they could trigger a short squeeze, an unusual condition that triggers rapidly rising prices of a stock(against the bets of short sellers), since there were significant amount of short orders. The movement gained a massive interest in a very small timeframe, and achieved 73 million pageviews within less than a day.
The motivation of the buyers of Gamestop(GME) varied. Some thought the stock was undervalued, some were just riding the wave, and for some it was more of a message to the Wall St. rather than the money. As a result, on March 10,GME shares closed at $246.90, a whopping 2000% of what it was 3 months before. The movement caused some short-seller hedge funds to lose as much as $4 Billion. Even though the exact numbers were not announced, there are clearly losers of this battle.
In the constantly changing environment of trading, can Wall Street keep its supremacy by adapting technologies and laws faster than individuals, or will we see more Roaring Kitties and Navinder Saraos using algorithms that they develop in their bedrooms and public forums to change the industry dynamics?
Related readings and videos:
https://en.wikipedia.org/wiki/GameStop_short_squeeze
