Are the Stock Markets Crazier than They Should Be?
Have you ever felt that sudden chill that runs down your spine when you bite on that ice cream too hard? That, to the degree of 100, is the sensitivity of today’s internet, and well, more specifically, the stock market.
I realised the stock market's reactivity to news when I first participated in a mock stock, and thought “So it’s just an exaggerated version of how the stock market reacts to news”. Turns out, it’s not so exaggerated. Because if Elon Musk tweeting out a meme can sway the market, then anything can.
This article deals with how sensitive the stock market can be to seemingly useless pieces of information and how that may have amplified due to COVID-19.
Has the Stock Market become a Joke?
The stock market is Elon Musk’s world and we’re just trading in it. Wonder why?
On July 1, 2021, Musk tweeted, “Baby Doge, doo, doo, doo, doo, doo.. Baby Doge, doo, doo, doo, doo, doo.. Baby Doge”
Don’t scratch your heads trying to find a deeper meaning, for it’s exactly as it sounds. After the tweet, Dogecoin surged 3%, while more interestingly, Bitcoin, the largest cryptocurrency in the world, plunged nearly 3%.
Developers Mr Markus and Jackson Palmer co-created Dogecoin as a joke in 2013. It is mainly based on the Doge meme that swept the Internet in the same year (and has now created a monopoly in WhatsApp sticker collections).
Musk once expressed his interest in the coin, saying, "Doge barking at the stars." and the price of Dogecoin soared by 20%. It’s called the ‘Musk Effect’. If you scroll through Elon Musk’s Twitter account, you’ll find an array of Doge memes that have gone on to move markets. The meme cryptocurrency once even became the fourth-largest cryptocurrency by market capitalisation.
An episode that shook the stock market- The GameStop Incident!! One day, retail investors on Reddit decided that (i) the short sellers were evil, (ii) punishing them would cause the stock to sky-rocket, and (iii) this would all be pretty funny. So the stock peaked at $483.00, which is 185.7% above the current share price. And mind you, the current price itself is grossly overvalued. Honestly, why wouldn’t it be? After all, GameStop is a meme stock (a stock that sees dramatic price increases, mostly fueled by people on social media, primarily Reddit, Twitter and Tik Tok).
Now let’s delve into practicalities. It’s humanly impossible to follow the news religiously, so how exactly does the impact intensify?
Enter HFT. High-frequency trading (HFT) is an automated trading platform that large investment and trading parties (like hedge funds, investment banks, and institutional investors) employ. It uses powerful computers to analyse the markets and spot emerging trends in a fraction of a second.
By being able to recognise such shifts, the trading systems send hundreds of baskets of stocks out into the marketplace at bid-ask spreads that are advantageous to the traders. For context, a bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept for it.
But how do these computer programmes do this? According to Irene Aldrige, Managing Partner at ABLE Alpha Trading, high-frequency traders compile a list of news sources like Stock Exchange Commission filings, business publications, and social media platforms like Twitter, and tell their computer programmes to skim through those sources looking for specific keywords (like ‘bankruptcy’ or ‘merger’) that signal something about the market.
So can a fake tweet cause a stock market crash? Potentially, yes. But these bots are programmed to filter through so much information that in the grand scheme of things, these methods prove more advantageous than inaccurate.
But my point is, what is moving?
And what is moving them?
Memes (or computer systems)
All these incidents make one question if we’re all just pretending that investing and trading is as calculative and artful as it seems? Because if Elon Musk’s tweets or some stranger Redditors can randomly decide for me the value of my investments, then why the hell am I wasting my time on Fundamental and Technical Analyses?
The Pandemic and the Instability of the Stock Market
We all know about Cristiano Ronaldo’s Coca Cola fiasco. For those who don’t: he arbitrarily removed two bottles of Coca-Cola during a press conference at the Euro 2020, while asking for them to be replaced by water. The video gained a lot of traction. It inspired at least five more such moments across the world. Overall, it was pretty funny.
But you see, it wasn’t funny for Coca Cola, because in the aftermath, the giant suffered a staggering loss of $4 billion. The story seems pretty nonsensical to me, but it sure makes me wonder if things would have panned out the same way if it weren’t for COVID-19.
There is research that asserts the stock market has been more sensitive to the news during the COVID pandemic than otherwise. Just like us, humans! For instance, the findings of a comparative study confirm that the drop in stock prices during the COVID-19 era was more dramatic than the Swine Flu period, because of the presence of more speculation, rumours and negative news.
Another plausible reason for this could be that our existence has been shifting online minute-by-minute, during the pandemic. What’s virtual, seems real. So any piece of news online is more impactful than it would have been in normalcy. In other words, it’s harder to filter out what news would have had a bearing on your investing decisions pre-COVID and what news wouldn’t.
Second, it’s no secret that investors detest uncertainty. The pandemic has tossed onto us a record-breaking, all-time high of unpredictability, and that had to materialise as overly-sensitive stock market indices and traders, some time or the other.
While these are just hypotheses, only time can tell us if we will ever recover from this.
Why is Sensitivity Important?
By now it’s clear that it is important to acknowledge that sometimes, the stock market can be a little crazy.
But still, sensitivity is important. If people want to invest mindlessly, let them exercise their choice too. It sends a signal to the government and monopolists, that if the people are wronged, in the way of faulty policies or immoral corporate behaviour, consequences will follow, and the economy will tumble. And if every once in a while, we happen to observe notorious stock market activity, prices will readjust and bounce back to their intrinsic value.
To conclude, sensitive stock markets are like a well-functioning democracy. Which is to say, as long as the common people in it have the power to bring the entire system down, we’re doing okay.
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