The Future of the Stock Market from a Science Fiction Author’s Point of View
Look at the news. Powerful multi-billion hedge funds are felled by ordinary retail traders due to subreddit #WallStreetBets. Brokers that are supposedly only there to broker have blocked retail traders from trading the stocks that felled those hedge funds only to then allow them back.
It’s history in the making if you listen to the retail traders that are all excited and making noise. Wall Street has been defeated with its own rules! Things will never be the same!
This article is a science fiction author’s take on things and where I think the real revolution is going to come from.
I’m going to start by examining whether these are, indeed, historic events. Then I’ll move to the near-future to examine where the real power of change may come.
Are These Historic Events?
I think these events are historic only if you know the very recent history of Wall Street. If you take a wide view, financial giants fall every so often.
In 2010, the Flash Crash brought down the DOW 1,000 points in 10 minutes due to a bug in their AI algorithms but then climbed back. Something like that, but fatal, could happen again any day.
In 2008, if the government hadn’t bailed out the financial industry, it would have collapsed.
In the early 2000’s, the tech bubble crashed.
In the 1990’s Merriwether & Co.’s overconfidence of its Nobel Prize winners almost brought down the entire financial system.
In the 1980’s Black Monday almost brought down the financial system due to their insurance scheme.
And so on and so on backwards in history, all the way back to over a hundred years ago when J.P. Morgan bailed out the U.S. government. But it actually goes back further than that, as even then there were still crashes every 10 years or so.
Black swan events have been happening all the time… for centuries. The thing is that it’s almost never the same black swan event. So people correct for the previous one, but fail to foresee the next one.
Billionaires lost billions. Hedge funds exploded. It happens all the time. Any system that doesn’t take into account black swan events is short-sighted.
But Surely Wall Street Will Have to Change Its Rules and That’s Historic
Sure. Brokers will change their rules. Perhaps some hedge funds, mutual funds, and others may change their rules. Even laws may change.
But the stock market rules change all the time.
Stocks used to be traded in 1/8ths rather than in cents. An “uptick rule” was created to not allow shorts to bring down the price further on a stock that’s already collapsed. The PDT rule was created to limit the number of trades with little money to 3 day trades in every 5 trading days. And so on and so on back decades and centuries.
Wall Street changes its rules all the time. That’s not historic, it just feels like it.
How These Events Can Influence Our Understanding of the Future
The current ‘attacks’ by retail traders were against short selling companies who were, as they see it, “in the right”. The short sellers researched the companies, supposedly learned that they are massively overvalued, and bet that the price will go down.
The short sellers were attacked by a massive raise of the price, which led to losses that are bigger than 100% and are quite possibly higher than 1000%. (Plus, they probably used ‘margin’, which means they’re allowed to bet on bigger sums than they actually have).
As the short sellers exited their positions, they “bought to cover”, which meant they bought stocks, which raised the price higher and higher.
And so a $20 Gamestop (“GME”) stock which may have been overpriced, reached the price of $500 per stock within days.
At $500 it was, to say the least, overvalued. Wall Street watched with disbelief. The real disbelief was that the stocks’ value did not represent the company’s value.
It is hard to convey how hard it is for Wall Street and economists in general to accept that a stock’s price may, many times, not reflect the value of the company. And yet, that happens all the time, too.
Which leads me to the future of trading in algorithm trading.
It is estimated that algorithmic trading (computers trading faster than human beings in massive volume) is 70%-80% of the overall trading volume in the world.
Algorithms are usually allowed to see where traders want to trade, buy ahead of them in microseconds, then sell to those traders at a marginally high price. Do that millions of times you get a LOT of money.
Other algorithms try to predict human behavior and even other algorithms’ behavior. There are actually wars of algorithms going on behind the scenes. That sounds like science fiction, but it’s actually the present and the recent past.
Try to imagine what would happen if there were no human traders, only computer traders.
Remember that algorithms want to win rather than to buy or sell a company at a price that represents it, hoping it can predict if the company will improve, stay the same, or get worse.
Algorithms make money off of someone else’s mistakes. But if no one makes the first move, no one makes a mistake… What you would have is a giant chess board where the best move is to never make the first move.
Remember ‘War Games’? That was a good movie, and it’s right not only about nuclear war.
But that’s actually not my point. My point is that if the entire market was traded by algorithms, there would be no value to the price of a stock. If the algorithm makes money by buying, even if the company is overpriced, the algorithm will buy and make money. If the algorithm makes money by selling a stock that is underpriced, the algorithm will sell and make money.
Winning matters, value doesn’t. It’s a tactic. It’s a game where the aim is to win. It’s not about values.
Now replace ‘algorithm’ with the word ‘trader’. Traders can buy and sell regardless of the real value, too. Winning is what counts.
The real value is unimportant.
Here are the things I hope I’ve convinced you to consider:
- There is no value to a price of a stock.
2. There is no upside to algorithmic trading without human traders which they can exploit.
One last bit remains.
Some Stock Market Science Fiction
Take a look with me at the near future.
If I was a heartless money person in charge of predatory algorithms, wouldn’t I tell my algorithm (in charge of billions of dollars of assets) to do exactly what WallStreetBets did but more effectively?
I have more buying power. I have proof that it works. I could do it in a united, concentrated effort and gain 100’s of percent in a short time just by a concentrated buying of famously heavily-shorted stocks.
So I’m saying… watch out. If it works, the big kahoonas are gonna do it in a big way.
You can beam me up now.
