Retail investor activism is alive and well

The recent release of FMA’s targeted review of the NZX is timely on the heels of the ongoing GameStop saga. Technology is taking us to some interesting places, and market operators (and regulators) need to keep up. 

The review slammed NZX’s technology capability. A series of issues last year including trading volume-related system issues and outages in April, and a DDoS (Distributed Denial of Service) attack in August which repeatedly halted and disrupted market activity proved highly concerning. NZX’s trading system was also found to be unable to trade securities at zero or negative yields. 

The review findings that NZX does not have adequate technology capability across its people, processes and platform to comply with market operator obligations are alarming, with NZX’s systems not meeting regulatory requirements for fair, orderly and transparent markets.

Worst of all, market participants gave feedback that NZX did not accept responsibility for known systemic issues and was slow to act, with crisis management planning and procedures lacking. Indeed NZX self-rated its IT security profile at a basic maturity level, indicating that a number of best practices had not been adopted despite the fact that cybersecurity resilience is critical for NZ’s financial services industry.

Crowd sourced investment revolution

In the meantime, the rise in popularity of trading platforms such as NZ’s Sharesies, and Robinhood in the US, has seen an investment revolution with a shifting of the balance of power to individuals. These platforms give easy access to sharemarkets, and new investors are piling in.

The whole world watched as individual retail investors banded together to play Wall St at its own game, with “meme stock” GameStop (GME) shares going stratospheric last week and crippling major Hedge Fund short sellers to the tune of $5b fuelled by the wallstreetbets forum on Reddit. It would be fair to say that Wall St short-sellers are loathed by many private investors for the positions they take against some businesses, often contributing to falls in their share price. As a high profile example, Elon Musk has previously been on the receiving end of hedge funds working in this way to drive down the price of Tesla shares. It would also be fair to say he is not a fan of this strategy:

No alt text provided for this image

There are some significant challenges that regulators will need to deal with, including the power of anonymous users to significantly manipulate the markets via social media hype. And those providing trading platforms need robust infrastructure in place. Sharesies estimates that around 10% of trades in the last two weeks have involved GME, with some minor issues with orders being delayed or rejected by the exchange itself. Robinhood resorted to restricting trading in the stock of GME and several other companies, ostensibly due to brokerage infrastructure being overwhelmed, and has since been hit by a lawsuit claiming market manipulation by restricting retail investors’ access to trading.

We’ll see a lot more of companies riding the hype cycle…hold on for the ride, it’s about to get VERY interesting.

No alt text provided for this image