‘Rude awakening’ lies ahead, traders warned

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 chief executive James Gorman said those involved are in for a “rude awakening”.

The situation wasn’t surprising, he said, given how much liquidity was in the system. “This looks like pockets of frothiness, some irrationality undoubtedly, some nonsense undoubtedly.”

Heavily shorted companies have become big targets of retail investors, pushing up their prices.

“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 its 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, said Anne Richards, chief executive of Fidelity International.

The combination of these transparency rules with technological advances and abundant cash has led to events that were never anticipated, Richards said. And at some point, the authorities would need to respond.

Regulators around the world will probably be “scratching their heads” as they try to come up with the right response, she said.