INVESTING IN CHANGE NETWORK EFFECTS AND GAMIFICATION - Cardano
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INVESTING IN CHANGE NETWORK EFFECTS AND GAMIFICATION
At the beginning of 2021, a new phenomenon
percolated its way through the consciousness
of financial markets – the democratisation of
the ‘short-squeeze’.
The ‘short-squeeze’ itself isn’t Network effects are an interesting topic and
a new thing. It’s an old term that represent a huge component of what makes the
internet age work. From the power of viral marketing
refers to the actions of one or to the spread of fake-news, network effects influence
more market participants acting our interactions with one another in ways that could
in a manner than forces short- only be imagined just a few years ago. Now we know
that they can also influence investment markets – a
sellers of a security into having to change that has profound implications for market
reverse their positions. This can volatility and financial stability.
be achieved by buying the security
until short-sellers’ positions
become too risky to maintain. Let’s take a look at how this
particular network effect arose.
Legitimately, this is sometimes the technique
and motivation behind a public company simply The first thing to consider is gamification – the
announcing a share buy-back programme to prop structuring of an activity that isn’t a game so that
up a falling share price. it replicates the experience of playing a game.
Successful gamification will increase participants’
But, techniques and motivations are not that engagement, happiness and loyalty to the provider
important right now. One important pre-requisite of the activity. It will keep them coming back
for a ‘short-squeeze’ to be effective is that the for more.
‘squeezer’ needs access to more capital or needs
to be less price-sensitive than the ‘squeezed’. This Some techniques include; player feedback, rewards,
ensures that the ‘squeeze’ can be upheld until the progress charting (points, badges, leaderboards),
‘squeezers’ pips squeak and they capitulate on levelling up and control of outcomes (even if that
their positions. Equilibrium is then restored to the control is illusionary).
market which allows the ‘squeezed’ securities to
settle at a new higher price.
Used as a force for good, gamification has
What made January’s ‘short-squeeze’ on been demonstrated to improve children’s
GameStop Corporation’s equity so new was that the outcomes in educational settings. What child
‘squeezers’ individually didn’t have access to vast wouldn’t want to strive to level-up to maths-
amounts of capital. They could however harness the ninja just after successfully being designated
network effects of social media to gather together as maths-master by scoring 10/10 in the 1
sufficient power to make the pips squeak on some level down more elementary test?
of the world’s largest hedge funds.
Investing in Change | Network Effects and Gamification | March 2021 02Gamification has infiltrated the world of amateur What does it mean for the future?
investing. Message boards abound where stock
pickers pitch their recommendations, triumph The GameStop episode is just a small scale
their successes (a casual disregard for losses isn’t example of how things change when new players
unusual either), curate follower lists and generally enter the market and disrupt the status quo. There
engage in behaviours that make the world of are large scale examples too. As Sovereign bond
investing seem like it’s a fantasy sports league. yields rise, a central bank intervening with yield
These new players are focused on investing as curve control to flatten its risk free curve,
though it were a participation sport rather than is disruptive behaviour of a similar ilk.
an objective based activity.
Whether the disruption is incidental (GameStop)
This trend has been actively encouraged by the or premeditated (central banks) both set conditions
big retail brokerages for whom activity is king. that are likely to have permanent effects upon the
Retail brokerage is a volume business despite investment landscape. You cannot assume that all
commission-free trading being here to stay i.e. market participants share your objectives nor play
there is no longer a direct linkage between trading the game according to your rules.
volumes, commissions and brokerage revenues.
The adage, “If you are not the customer then you Long-term investors will increasingly find it
must be the product” applies here. The aggregated more difficult to invest solely upon the basis of
information contained within individuals’ order- fundamentals. Money creation, credit conditions and
flow is valuable enough to the brokerages that the trends derived from asset class flows all have a part
commissions that were previously charging clients to play. Investors will need to know who else is in
are no longer important to their business model. the game and what particular rules they are playing
by. What motivates an increasingly diverse range
Engagement, happiness and loyalty are key - of market participants to act and how their actions
gamification – they all stimulate more activity, might influence market conditions will become
which leads to more order flow and more increasingly important subjects for analysis.
information. A virtuous circle emerges for the
brokerages as they exploit the network effect Investing in change requires your strategy to be:
that retail participation in markets creates. • Nimble and dynamic
• Responsive to evolving conditions
• Ready for many different scenarios
• Equipped with a broad toolkit
Most importantly, your strategy
needs to be aware of the past but
prepared for the future.
Investing in Change | Network Effects and Gamification | March 2021 03Cardano Risk Management Limited is registered in England and Wales number 09050863. Registered office: 9th Floor, 6 Bevis Marks, London EC3A 7BA. Authorised and regulated by the Financial Conduct Authority.
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