GUEST BLOG [In]Securities: Soon May the Tendieman Come By Aegis Frumento Esq

February 5, 2021


Soon May the Tendieman Come

Last weekend one of my kids had the brilliant idea of shorting Game Stop (GME). He knew all about the Reddit chatter that was driving the price up, but I had explain to him the mechanics of shorting stock -- he'd missed the small detail that in order to sell stock you don't own, you first have to borrow it from someone who does own it, which means eventually you have to buy it back in order to return it to the lender. Once he grasped that, he had this insight: "It's just a meme," he said. "And when the meme fades, the stock will crater." And with that, he predicted that by Monday or Tuesday, GME would collapse, and he started pelting me with questions about how to open a brokerage account so he could short it, ending with could he borrow mine. 

Of course, I discouraged him from playing that particular market, and if he ignored me like he usually does he'll have made a small fortune. GME tanked from $425 last week to about $50 yesterday. My kid's timing was right on.

There's been enough written about the entire GME saga, and I don't want to pile on.  One of the better articles is this one in the Times, which goes into both the Reddit culture that spawned the phenomenon and the economic and regulatory issues around it. See . Rather, I want to consider whether we can in fact better understand modern stock trading by thinking of them as akin to internet memes, rather than as governed by the mythologies of fundamental analysis or the grimoire of technical analysis. The GME adventure presents an interesting case study. My son's insight was that memes become passé when old farts like me find out about them. He figured that by early this week, the crowd behind the GME meme would become bored with it and move to the next new thing. That's when GME's stock price would collapse, because he knew as well as anyone that Game Stop isn't worth a $30 billion market cap.

In one respect, his insight is not new. As the wise Yogi (Berra) once observed about an old haunt, "No one goes there nowadays, it's too crowded." That's the insight -- when an idea garners too many followers, it ceases to be interesting, and whatever residual popularity it retains among the less knowing has no basis in fact. It will eventually dissolve into thin air. 

In 1841, Charles MacKay wrote a best seller, Extraordinary Popular Delusions and the Madness of Crowds. The book is well-known even today, but it is only a compendium of the crazy stuff that groups of humans delude themselves into thinking. He covers three financial "bubbles," including the infamous "tulipmania" of the 17th Century, and then goes on to cover a host of non-economic manias, like alchemy, fortune-telling, witches, haunted houses and relics. Of relics, MacKay noted that the bodily parts of saints were highly prized, no matter how lowly. "Hair and toe-nails were also in great repute," he writes, "and were sold at extravagant prices." Someone should send a note to Mar-a-Lago, whose new resident is always looking for ways to raise cash.

The point is that bubbles are nothing new, but also that financial bubbles are just a subtype of the larger genre. A recent book by Adam Kucharski, The Rules of Contagion, explores this idea in detail. We are all familiar in this COVID-19 world with epidemic "waves." An outbreak results in a spike of cases, rising slowly, then rapidly until a peak, after which it collapses back to a norm. Infectious diseases spread exponentially until they run out of susceptible hosts, and in a constant population, the number of susceptible hosts declines inversely to the infection rate. At some point, the two lines cross, and that is when the outbreak peaks and recedes into the familiar bell curve. Vaccines, along with masking and social distancing, work to reduce the susceptible population, and that is what reduces the size of the outbreak and the risk of infection. That's why it's a mistake to think of vaccines and masks as primarily means of self-protection, or even of protecting those we come in contact with. Their effect is more subtle, acting to make the population as a whole less susceptible to infection. That's what reduces everyone's risk of infection, masked and unmasked alike. It's a probabilistic and statistical thing, which makes it very hard to explain to a general public that doesn't intuitively think in those terms.

Anyway, we understand this dynamic insofar as infectious diseases are concerned. What we don't know as well is that this same dynamic applies, generally, to all kinds of things that spread -- including rumors, hoaxes, conspiracy theories, internet memes. And stock tips. As the population susceptible to the new idea declines, the spread peaks and recedes.

Kucharski doesn't mention this in his book, but this is especially so in the modern world because of what has been termed the Attention Economy. See Economics deals with allocation of scarce resources. In a world awash in information, it's not the information that is scarce. Rather, and counterintuitively, it is the attention available to devote to that information that is limited. There are only so many people, and so many hours in a day. As a result, all of us are bombarded by demands on our attention, and we only have so much to go around. And unlike most things, you can't buy attention; you have to attract it by being more interesting than the next guy. And once you have my attention, my money will follow. Michael Goldhaber made this point very well in is essay The Attention Economy and the Net, back in 1997. He was prescient, but few listened.  See

At around the same time that GME was being bid up, another meme went viral. Scottish postman Nathan Evans posted a TikTok video of himself singing a sea shanty. Within weeks, other TikTokers posted various accompaniments, vocal and instrumental. A mashup of all of them is insanely great: 

But the internet moves fast. Evans's feat managed to attract a critical mass of attention, and as Goldhaber said, attention attracts money. Within weeks, Evans had a record contract.

At around the same time, Keith Gill, a MassMutual registered representative free-lancing with a Reddit podcast and operating under the name Deep F-ing Value (DFV), started hyping GME, proclaiming that he was going to buy. He did buy, and at the peak his account was worth some $48 million. And then his followers bought, and encouraged each other to buy. The goal was to stick it to The Man -- he being the hedge funds that shorted GME when it was at $30. The idea of making a personal profit was not foremost in the Reddit chatter. For a time, the participants were, like players in a game, trying to best each other at buying GME at the higher price! 

It's obvious that these folks were not trading as most of us understand it. This was stock buying as performance art. As my son noted, it was a meme. We should not be surprised. In many ways, almost everything that happens these days seems to be some kind of meme, a thing performed. Not for nothing were the rioters at the capital organized by cosplaying Rambos and a half-naked bicorned "shaman." They were ready for their close-ups, and they all brought their own cameras to make sure they got one. 

However, stock prices can't be kept high unless the buyers of GME were to hold the stock they bought. A buy and hold strategy is usually the best, but it's not much of a performance. And so, the sell-off came, as we all knew it would. But having created an artificial bubble once, the Reddit crowd knows it can do it again. This suggests a whole new way to think of trading, one where the internet chatter of the "dumb money" matters more than the management spin in issuer earnings calls. Perhaps it always did.

Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City.  He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations).  He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits.  Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has rare depth of experience in the securities and corporate governance laws affecting senior executives of public corporations.  When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests. 

Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.  He graduated from Harvard College in 1976 and New York University School of Law in 1979.  Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.  He is the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.


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