Power of crowd: lesson for Pakistan from Wall Street fight
For long, stock markets were largely seen as a club where those with means got together, found ways to become wealthier, and it all came at the expense of someone else. Usually, that someone else was not part of the club. Okay, sometimes they were. But because it was all a club, they looked after each other in the next round.
Stock markets, in the strictest sense, do create wealth but it is not the same as job creation or bringing value. That value, or job creation, comes from listed companies that opt for financing through these markets. In a nutshell, and perhaps this needed to be stated earlier, a stock-market trade will always make one party better off, and the other worse off. But because there is no compulsion in conducting a trade, advocates of the free market usually get away with a pass on this one. But what happens when you are forced to sell and buy or disallowed from buying or selling a stock. It creates havoc.
It happened in Pakistan in 2008, when trading was suspended by the regulator in September after the KSE-100 Index – considered a benchmark for market performance – plummeted from its high of 15,676 in April to near 9,000, wiping off the investments of many. The fall coincided with the global financial crisis.
Just the previous year, the KSE-100 Index had climbed almost 40%, luring new investors into its club. When trading did begin at the then Karachi Stock Exchange in December – not knowing when another suspension could be triggered – investors dumped their stocks as the KSE-100 went crashing to below 5,000.
Imagine the investors who entered at 15,000. On average, their investment would have been reduced to one-third in a matter of months.
However, this is not about what Pakistan’s reaction was to the global financial crisis. It is about how Wall Street reacted when its privileges were challenged by a crowd. A crowd powered by social media and fuelled by sentiment. It was about the ability of a crowd to challenge the club that bet against a particular stock or a group of stocks. The crowd said no.
In simple terms, big funds bet that the stock price of a particular company would go down. Game Stop Corp had already seen its price come down from $50 in 2013 to below $5 before Covid-19 began. The pandemic did not make things better. So these funds continued to make money.
Read: KSE-100 snaps three-day winning streak
However, in 2021, a group of powerful devotees – calling them devotees is fair – decided to challenge the Wall Street people. For whatever reason, motivated by something or the other, this crowd said, ‘let’s do this’. Presenting a united front, they managed to buy enough that the price rose. Although gradual at first, from close to $5 to $20 in a few months, 2021 was the time the short-selling funds saw their bets become massive losses. The price skyrocketed to almost $350 within a few days.
Now, the problem with short selling is that this move has a higher downside risk. If you buy a stock worth $10, the minimum it can go is $0. You lose a maximum of $10. But if you short-sell – that is when you ask a broker who has the stock to sell it for you at the current price – the risk is higher.
Suppose you short sell at $10. The broker sells it for you, and gives you $10 for it. Now you ‘owe’ the broker 1 share of that company. And you have $10. When the price starts to come down, you buy it and give it to the broker. If you buy it at $3, the transaction is complete. You give the broker back their 1 share, and you have $7 from this transaction because $3 were used to buy the share. Now imagine that the price starts to climb. At some point, your broker will ask for their share. When do you buy it? The risk is even greater as the price can continue to climb to $300, and you will lose much, much more than $10.
And this is hurting the big funds. The problem isn’t their pain. The issue is that mechanisms were put in place that made it difficult for clients to conduct the trades. But that is another dimension.
This entire saga conveys a simple point that many literary works have conveyed so many times before. The power of the crowd.
Crowds have always had the power – to overthrow governments, pick a clown as prime minister, rally behind a movement to oust colonisers, or put Wall Street to the brink of disaster.
James Michael Surowiecki, an American journalist, very eloquently put in his book, ‘The Wisdom of Crowds’ that the large groups are smarter than the elite few, no matter how brilliant. Their wisdom and motivation aside, their power certainly came to the fore in January. With social media, the power of crowds has never been greater.
If a crowd can take on literally the giants of the game – a club that sits, wines and dines together and has practised their craft for decades, then there is a lesson in it all.
How unfortunate that in Pakistan, there is there is so much that divides us and next-to-nothing that unites us.
The writer is former business editor of The Express Tribune, and winner of the Citi Journalistic Excellence Award 2018. He holds a MBA from Cass Business School, and is currently associated with the CEJ-IBA. His Twitter handle is @bilala_memon
Published in The Express Tribune, February 1st, 2021.
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