Finance industry stalwarts are responding to the market mania triggered by retail traders on Reddit. They’re not impressed.
BlackRock Vice Chairman Philipp Hildebrand called the phenomenon irrational “nonsense,” while Morgan Stanley CEO James Gorman said those involved are in for a “rude awakening.”
“It is not surprising when you think about how much liquidity is in the system, how much policy has fueled asset prices in recent weeks and months,” Hildebrand said in a Bloomberg Television interview Thursday. “This looks like pockets of frothiness, some irrationality undoubtedly, some nonsense undoubtedly.”
Heavily shorted companies have become big targets of retail investors, after an epic short squeeze in GameStop helped drive up the stock more than 400% this week. The shares took a pause from their meteoric ascent on Thursday morning, after a brief outage of the Reddit forum whose users have fueled the stock’s surge.
“All you need is a correction in the market and that’s not going to look like such a great idea,” Gorman said at the Future Investment Initiative conference in Saudi Arabia. “There’s a bunch of people in for a very rude awakening at some point here. I don’t know if it's going to happen tomorrow or next week or next month. But it will happen and that will pass.”
The recent trading frenzy shows the unintended consequences of regulatory changes put in after the last financial crisis, including rules on disclosure of short positions, Anne Richards, CEO of Fidelity International, said in a separate Bloomberg Television interview on Thursday.
The combination of these transparency rules with the technological advances and abundant cash has led to events that were never anticipated, Richards said. And at some point, regulators will need to respond.
“The thing that they could do very very quickly is remove the transparency on where the big shorts are, because that seems to be the trigger,” Richards said. “But then of course that takes away from that market transparency which everybody wanted to put in place after the financial crisis.”
Regulators around the world will probably be “scratching their heads” as they try to come up with the right response, she said.
— Additional reporting by Tom Keene
