In the past decade, we have all been witness to an extraordinary new phenomenon. 

Beginning with the Arab Spring, we have seen powerful social movements erupt as disparate individuals banded together in unprecedented numbers to disrupt the status quo by channeling widespread discontent using the ubiquity and speed of social media. 

Just last summer, we watched as the widely shared video of the death of George Floyd spawned a worldwide anti-racism campaign. This January, we watched this phenomenon once again as social-media-fuelled views boiled over into a mob attack on the U.S. capitol.  

Also in January, financial markets felt the potency of social media for the first time as retail investors coalesced into a powerful cohort of traders via Reddit, taking on the big boys of Wall Street and driving share prices of companies like GameStop into the stratosphere. 

The GameStop stock surge happened because people had a theory. Take an over-shorted stock; if enough people buy it at the same time, it will squeeze institutional short sellers’ margin limits, thus forcing them to buy back their positions and drive the price up. 

So, these retail investors got together online en masse for a common purpose. They tested their theory, and it worked, at least in the short term, creating an unprecedented feeding frenzy as share prices skyrocketed. It worked so well that at least one big Wall Street hedge fund had to get bailed out by a second one, to the tune of US$2 billion. 

It’s no accident the company at the centre of the storm is called Robinhood. Just picture the man who was called to testify about all this in front of the U.S. Congress: though he wore a suit and tie for this occasion, his signature bandana was clearly in view behind his left shoulder, hanging off the once-iconic, now-cliché motivational picture of yester-year featuring a kitten clinging to a branch and the tag line “Hang in There.” Definitely more Sherwood Forest than Wall Street. 

There are myriad stories of winners and losers in this scenario. But at its core, it was about how individuals working together through social media in ad hoc coalitions can punch above their weight. They can test new ideas, challenge accepted norms, and outpace lawmakers, regulators, and bureaucrats in changing the fundamentals of the game. 

As we look forward, this is a significant new reality that will likely have some impact on the industry going forward. 

Unexpected circumstances and unintended consequences 

While social media played a major role in the GameStop disruption, at least two other elements affected the timing: one of the industry’s own making and one beyond its control. 

Beyond its control was the COVID-19 pandemic, which came at us out of the blue. Leaving aside the obvious health, economic, and political impacts, the pandemic has meant that for the better part of a year, a large portion of the working population has been sitting at home. They’re working but are perhaps not as busy as they used to be, or they at least have more time on their hands with no commute or other day-to-day social activities. 

Furthermore, these working people have more money on hand this year. They simply aren’t spending it, with restaurants closed, theatres dark, and travel non-existent. So, there’s a lot more discretionary spending money burning proverbial holes in people’s pockets. 

So what are they going to do with this extra money? Some people are saving it, stowing it away in conventional products they may have already set up. But it turns out that millions are taking a little bit of that windfall and investing it in what one might call fun ways, including taking a flyer on the stock market. 

In fact, the Investment Industry Regulatory Organization of Canada (IIROC) says that about 2.3 million new investment accounts were opened in 2020, significantly more than twice as many as in any previous year. 

By and large, these folks are going online and buying what’s hot—with “hot” being defined as what is being talked about on social media. Additionally, and this is where the law of unintended consequences comes into effect, the industry itself has made investing relatively less costly through the availability of zero-commissions trades. Robinhood is perhaps the biggest name in that game in the U.S., but we have our own zero-commission providers here in Canada. 

Zero commission means that clients can now trade any number of shares, and it doesn’t cost them a penny. So, we’re seeing more people dabbling—buying, say, one share at $300, reasoning that at worst, they risk losing only $300. The evidence from recent months shows that this appears to be a risk more and more people are willing to take. 

So when millions of individuals came together over social media to focus on over-shorted stock—in the hopes of both making some money and beating institutional investors at their own game—the result was an explosion in the volume of trades that tested our institutional infrastructure. Neither Canadian banks nor the Canadian capital markets were ready for that. The hard truth is that for four or five days in January, at the height of the GameStop frenzy, there was tremendous stress on the system across Canadian capital markets because of this not previously understood change in client behaviour and its material impact on volumes. 

Witnessing it was not unlike watching news footage of whole communities in Florida getting stuck in gridlocked traffic trying to flee from an oncoming hurricane. 

In the case of National Bank Independent Network (NBIN), we had completely upgraded our own infrastructure last year to handle the added demand caused by the pandemic. No doubt other institutions did the same. We thought we were in good shape for another two or three years. But lo and behold, we were not. That’s why last month, we completed another full upgrade to double our capacity yet again, because we believe we have not seen the last of these disruptions. 

These two factors—the pandemic and zero-commission trading—created the perfect environment for people to come together through social media to challenge the status quo. 

Less volatility in Canada, but we must remain vigilant 

It’s important to acknowledge that while Canadian markets felt the pressure of the unprecedented volume of trades on our infrastructure here, we were not as seriously affected as those in the U.S. At least not this time. 

It’s been well documented that part of the problem was that Robinhood did not have enough capital to fund all the margin accounts they had. We didn’t see that issue in Canada to any great extent, if at all, and we certainly didn’t see it at National Bank. 

For one thing, Canadians are generally much more fiscally conservative compared to our southern neighbours. We don’t take on a lot of margin debt needlessly on a relative basis, and we are much less likely than our neighbours to throw our chips in the ring, roll the dice, and hope for the best. 

We are, in fact, lucky to have the luxury of lagging behind them. This was reinforced in 2008; when the American housing crisis hit, we saw very little, if any, of the effect in Canada (though we may be in our own crisis now). Then, as now, we all watched with great interest, because we know that the dog does wag the tail, not the other way around. As a result, our industry leaders and our regulators take great pains to be current with what is happening in the U.S. so that we can avoid the pitfalls that occurred there. This is especially important in an age when social media is border agnostic. 

Yet we cannot escape the fact that even now, despite our differences, we are not fully insulated from the changes that are sweeping the U.S. and the rest of the world thanks to the power of social media, and that means we must pay careful attention to the major issues emerging from the GameStop situation. 

More social media disruption is inevitable 

First, given that the short-squeeze strategy worked, even for a while, we know someone, somewhere is looking for other ways to use social media to focus the energies of millions of “little guys” to challenge the way things have always been done.  

Even now, there is a proposal out there from a social media influencer in the U.S.—and it is not all that long ago when no one knew what a social media influencer was—to set up an investment fund that uses bots and algorithms to trawl social media for trending companies, then invest in them and invite his followers to get in on the action. How does the conventional industry respond to action like that? 

As well, consider the disruptive potential of cryptocurrencies like Bitcoin. For the most part, these roll along just below the horizon until, from time to time—like now—they grab the spotlight, and everyone wrings their hands wondering how to respond. It’s a fool’s game to try to predict the future, but this is one area that seems ripe for significant social movement. 

So, the GameStop story may be done for now, but there will be another name and another theory, maybe not tomorrow, but not that far off, that will test our long-held assumptions and our ability to adapt. 

Financial markets must continuously adapt—and fast 

Because of social media and broader digital technologies, we’re evolving at such a rapid pace that the world can’t keep up—not regulators, not governments, not banks, nobody. Here at NBIN, a few of us have engaged with a professional to get us more up-to-speed on these trends. 

It is true that in February, the U.S. Congress did hold hearings on the potential for seriously disrupted capital markets due to the GameStop frenzy. However, as of the writing of this article, nothing substantive has come out of the hearings in terms of amended regulations. 

Fundamentally, we need to learn to adapt to many more things much more quickly. The GameStop episode has provided clear insight into one type of disruptor in our capital markets system, and it has shown us that we need to carve out resources to make sure we have good intel on what is being talked about on social media platforms. 

This does not in any way mean impeding such discussions. Rather, it means knowing what is going on so that, collectively, we can adapt and respond quickly, but in measured and productive ways. 

Remember the little guy 

Finally, whatever we do as an industry, we must respect the right of individuals to invest as they see fit. We also must ensure they do not get swept up by popular but unsound ideas and FOMO (fear of missing out). 

When FOMO hits, it’s easy to forget there are skilled professionals who trade for a living and use a vast array of tools and resources that make them tough to compete with, let alone beat. 

How do we in the industry strike a balance between enabling more access to the markets while at the same time ensuring that people tread cautiously (or at least fully understand the risks)? 

Finding that balance is perhaps our biggest challenge. 

Disclosure: I don’t have any position in GME or any other stock mentioned herein and never have. My opinions stated herein are my own and may not reflect the position of my employer. 

Find Mike Tocheri on LinkedIn 

Mike Tocheri, “Have the rules of the game changed?” LinkedIn Pulse, January 28, 2021, 

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