Playing the Game: What does the GameStop frenzy tell us about the cattle market?
for Tri-State Livestock News
What do unstable cattle markets and a struggling mall-venue video game retailer have in common? Not a lot – except the idea that markets may be more easily manipulated than most people would like.
Earlier this year an anonymous online community of amateur traders rallied on the social media site “Reddit” to take down Wall Street by buying stocks in the struggling retail outlet GameStop. Many speculate the move was simply to show that they could influence the market. They succeeded.
One could venture there is not a lot of common ground between Reddit users and ranchers. Reddit is a social media forum and the seventh most popular website in the U.S., comprised of virtual anonymous chat groups. It trends toward insider and snarky dialog among its users, called “Redditors.” Reddit communities exist for every topic under the sun.
In January word spread on among an online group of “Redditors” that giant hedge fund companies had short-sold stocks of GameStop, a Texas-based retail outlet that had not seen acclaim since the heyday of the retail mall outlet, and with COVID, was now on life-support. Shorting a stock means to bet against it – that’s its value is going down. The margin is then gained by buying back the stocks at a lower price.
Whether out of spite, profit opportunity, or boredom from being locked at home in a pandemic, the amateurs united and bought stocks in huge numbers, egging each other on through their anonymous forum, and reversed the downward movement in what is called a “short squeeze.” From Jan. 13 to Jan. 27, the value of a single share of GameStop’s stock increased from around $17 to a high of $348, creating noteworthy losses for professional fund managers and gaining worldwide attention.
Reporters, economists, strategists and members of Congress are still trying to make sense of the frenzy that momentarily toppled Wall Street. The question that begs to be answered from ranchers is: Can we do this in the cattle market?
Derrik Hobbs of Warsaw, Ind., is managing principal for Silveus Financial, where he works to provide risk management services to agricultural clients. He summarizes the GameStop scenario as a “perfect storm” by explaining three layers that amplified the market in this extreme situation, and says it would be highly unlikely they could be directly applied to the cattle industry for a similar situation.
The first risk of big movement is having a large net position – either short or long. “When a group of traders or investors get heavily biased one direction, it creates risk of the other direction being very violent.” That skew has an industry term called the “commitment of traders.” In the case of GameStop situation, the investors were betting downward, and the risk was upward. They bet big, and in response, so did the Redditors.
Liquidity impacts these major swings. A lower average daily volume commodity will be more heavily impacted in a large group of investors trying to get in or out. “This is one of the major problems of cattle, our average daily volume is very low,” says Hobbs. “If there’s not a lot of volume, and I have a giant position short or long, and all of a sudden people want to get out of or into that market, that big position has to get out of a market that doesn’t have liquidity.”
Second, social media algorithms in today’s instant world have a strong, widespread and almost instantaneous influence on markets. In the case of the Redditor investors, a counter-cultural movement to “stick it to Wall Street” surfaced, and spread like wildfire among a group of investment-protestors. As Hunter Morrison reported on the University of West Florida news site, “Getting rich was not the purpose of driving up GameStop stock value. In fact, its purpose was to bring hedge funds, or investors that use high-risk methods to obtain as much capital as possible, to their knees. This form of digital protest is unlike anything ever seen in the stock exchange.”
Third, in the case of GameStop, due to the pandemic “we had an entire world just sitting at home with access to free trading accounts,” says Hobbs. Sites like Robinhood, which states its mission is to democratize financial trades, allowed day traders to buy and sell all day long at no cost. “One thing GameStop did not have was trading limits,” says Hobbs. “Feeder cattle have daily limits. Those trading collars, or price limits, stop that emotional drive and stop an algorithm from going wild.”
Scott Varilek with Kooima Kooima Varilek Trading says the funds are an important sector of markets that help provide liquidity. “Otherwise it would be a bunch of hedgers and four packers,” he says. Still, when you see fishy stuff happening, you always wonder what is optimum, he adds.
Varilek says there used to be more funds that were willing to be long in the cattle markets, which helped markets find higher levels. Right now there’s a lot of volatility, and cash continues to stay depressed. “We’re seeing how awesome demand is, but we still have a cash market that is dead. Our market isn’t tied to something near as strong anymore,” he says.
Hobbs says he sees the lesson learned through the Game Stop case is that volatility is going to create price swings beyond the value of a stock or commodity – for a time. “Volatility will do that. But volume and more people in our markets will allow that inefficiency to come back to normal.”
He says his fear from this situation is that people are going to overreact and call for legislation that actually drives players out of the market, when in fact, more players create stability. “We need to control how short-term price movement happens, but more than that, we need to keep participants in the game,” says Hobbs. “One thing history has proven is that markets can be manipulated for a very short time, and then will correct to fair value.”
Everyone is trying to figure out a solution – both to avoid another GameStop and to add grit to the cattle market. “No one has the right answer,” says Varilek. “All the cattle groups are trying to come up with the right answer but leave it to us, a bunch of cattle feeders, to not get along.”
Meanwhile, the game clock is ticking.
“If we don’t start to come together,” says Varilek, “it could be too late.”
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