All Wall Street can talk about at the moment is the short squeeze that a group of individual investors, rallied on the social media platform Reddit, forced on institutional traders who were shorting GameStop, AMC and other struggling companies.
But the bigger story is that this entire episode highlights the fact that the market is, at the end of the day, just another type of voting mechanism. It aggregates people’s voices and collects their opinions together, just as elections do. And the technologies that have shaped the fintech revolution in recent years are both contributing to this shift and hold the keys to solving it. The question is, how?
As we already know from the last four years in Washington, social media and technology platforms can amplify and influence those individual voices in many new, and sometimes unexpected, ways. What we saw this past week was a coordinated effort to aggregate and amplify the voices of hundreds of thousands of individual investors, and it was no different from what happened during the 2016 and 2020 elections.
People saw a problem, they connected over shared interests online, and they took action as a whole rather than as individuals.
In academia we refer to these forces as animal spirits, which encompass all of the instincts and emotions that influence and guide investor behavior. When this affects equity pricing, it is often called a sentiment factor. We’re learning now that the sentiment factor in the current market is much more important and volatile than ever before.
Part of this is due to the rise of consumer-facing financial technology, which has facilitated this expression of voice. From trading platforms like Robinhood, to crowdsourced forecasting sites, to data-driven investment apps, all of these new tools are offering different ways for end investors to express their voices in the market and make their interests heard. This is new. The traditional gatekeepers of the financial world--the brokerage houses—have lost their power to control who can access the markets and how much influence they have.
In my view, this is a good thing.
We should all want more people participating in the financial markets because the core problem over the last two decades has been wealth inequality, and the biggest driver of wealth inequality is the fact that not enough people are participating in the equity markets. Just getting more investors involved would do more for the U.S. economy over the long term than any stimulus checks ever could. For that reason, regulators should take care not to kill this new participation just as it is getting started. The onus to thoughtfully oversee this new wave and ensure that it’s fair for all can and should fall on the fintech firms themselves.
This reflects a fact that we’ve seen over and over in regards to new technologies.
Increasingly, the role of technology in society is to democratize access and represent the interests of the individual. We’ve seen this on Facebook, where divergent interests and opinions coalesce into voting blocs that can swing elections. Now we’re seeing it on Reddit and Robinhood, where end investors and consumers are coming together to influence the broader market.
But, with this great power comes even greater responsibility.
In this new reality, individuals can now have a far greater impact on the financial world than ever before. But this access needs to be provided by fintech companies in ways that are responsible and sustainable, so capital doesn’t storm in all at once as happened in recent weeks.
To be effective, fintech’s guardrails need to be preemptive rather than reactive. They need to empower investors to act in their best interests rather than fall prey to the impulses of the crowd. And they need to be automatic and universal. Fintech already has the tools to accomplish this–leveraging artificial intelligence to flag unverified information, offering algorithm-based potential loss and risk scoring, using real-time filtering to prevent problematic behavior such as excessive leverage trading before it even happens. The same tools that are opening up access to the market can and should be repurposed to control that access to prevent bad actors.
This is the power of technology in financial services. Not only can it more proactively address the risks and challenges of changing investor behavior, but also help to ensure that the market remains healthy and secure in the years ahead. It is a new and expanded role for the industry, and it is already shaping up as the future for financial technology.
Dr. Vinay Nair is CEO of The TIFIN Group, special advisor to JP Morgan, and a visiting professor at Wharton.
