After some detailed research, the Federal Reserve said on Monday that it is beginning to worry that the recent and unprecedented volatility in meme stocks like GameStop
and AMC Entertainment
are creating pockets of risk inside markets that could create real problems for the entire U.S. financial system.
On Tuesday, many of the self-professed “Apes” who created that volatility reacted to the Fed’s concern about meme stocks in a way best represented by, well, a meme:
Based on actual text from the Fed’s most recent financial stability report, zero-commission trading apps and investors using social media to coordinate their trades have created a weaponized “echo chamber in which retail investors find themselves communicating most frequently with others with similar interests and views.”
In turn, the report found, those like-minded investors create huge waves of volatility and risk that could create real issues for the markets and the financial system in a downturn, especially with so many of these mostly younger retail investors exposing themselves to massive losses using leverage and options to execute their trades.
But that risk also can be felt elsewhere. Fed governor Lael Brainard wrote in a statement accompanying the report that it has already been seen in the Archegos Capital Management meltdown saga and could spread.
“It highlights the potential for nonbank financial institutions such as hedge funds and other leveraged investors to generate large losses in the financial system,” Brainard wrote on Monday.
But while that warning- –which wasn’t Brainard’s first time ringing the alarm on the topic— might have been of concern for Wall Street, retail investors were unshaken.
Instead, many retail investors on social media spent Tuesday telling the Fed that using stocks to upend the existing structure of the financial system, by making hedge funds bleed, has been one of their goals all along, using the volatility to reveal what they see as widespread corruption.
After all, it’s been no secret that Reddit’s Apes would like nothing more than to see hedge funds crippled by their own actions. Many individuals also expect the end result of that destruction to be a fairer system in which the little guy can thrive.
“How is it that the ultra rich can basically GAMBLE in the stock market with over-leveraged positions, Dark Pools, insider information, etc. for YEARS and there is nothing to worry about,” read one very popular post on subreddit r/Superstonk.
“All of a sudden a group of people find out about some bulls*** that the ultra rich are doing to generate infinite money and BAM, HOLY S*** GUYS, THE ENTIRE MARKETS AT RISK OH NO!!!!!!”
Elsewhere, the takes were even hotter.
“Yeah, these are pretty big words coming from an entity that printed 33% of money into existence in a year and then claimed that it wouldn’t lead to long term inflation,” opined user doned_mest_up. “They don’t quite yield the power over the economy that Reddit does, I suppose.”
But regardless of how Redditors or other retail investors feel, it is worth noting that Brainard’s involvement in the report should not be taken lightly. It has been recently reported that she has interviewed for the top job at the Fed and her chairmanship could include a much closer look at retail trading than Chairman Jerome Powell’s has so far.
Speaking of scrutiny, let’s not let the day end without a quick chat on Robinhood
The zero-commission trading app might not have been named in the Fed’s stability report, but its presence was felt everywhere. A close reading of the report indicates that Brainard has a lot of questions about how Robinhood has impacted the wildness of 2021 and what it could do going forward.
As we’ve already talked about here, Robinhood has spent the last few months under siege from multiple sides and took a pounding last quarter. Despite some political energy being expended on protecting its precious payment for order flow business model, regulatory pressure will not wilt anytime soon thanks to Robinhood’s latest “Oopsie.”
The company disclosed on its blog late Monday that one of its customer-support employees was hoodwinked into giving a hacker access to some of its server forest on Nov. 3. About 5 million email addresses and the full names of about 2 million customers were compromised in the attack.
According to the blog post, the hacker demanded ransom for the information and Robinhood did not clarify it paid or not.
After a tough 10 months for the company’s reputation, the hack came at a pretty poor time.
Google searches for “delete Robinhood” exploded on Tuesday as more users rushed to the exits of an app that has already lost luster to many die-hards in the meme stock movement.
And while data of Robinhood’s latest exodus will probably not be available for a while, a sense of it was easy to find on Tuesday in a perfect place for meme stocks: a tweet from a meme stock influencer.