How ‘Flows Before Pros’ Is Disrupting Stock Markets

It seemed inevitable that the populist forces that have disrupted almost everything else in recent years would eventually arrive to democratize investing. But the sheer impact of retail trading has been shocking, primarily to financial professionals who appeared ill-equipped to deal with it. Organizing via social media, the amateurs have been able to send so-called “meme stocks” like GameStop Corp. soaring, while hedge funds that bet against the chosen companies feel the pain. Some worry that the battle between the “flows” generated by small investors and the “pros,” or professionals, artificially pumps stocks higher in a feedback loop that could lead to a collapse. Others worry such wild trading could ruin the purpose of equity markets: the efficient allocation of capital.

Online brokerage Robinhood Markets Inc. and other app-based platforms have brought a new wave of at-home traders into the market, raising concerns about the “gamification” of investing. New accounts surged early last year after a move by giant brokerage Charles Schwab Corp. to eliminate fees rippled through the industry, just as the coronavirus pandemic left many people stuck at home. Those traders on r/wallstreetbets -- the Reddit forum dedicated to “making money and being amused while doing it” -- set their sights on exploiting a financial system that’s perceived to have locked them out for years. Much to the horror of the financial establishment, r/wallstreetbets then figured out a way to capitalize on this system and bend it to their own will.