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The fall of the Archegos fund is just the most recent example of how excess liquidity can make financial markets more volatile and lead to odd outcomes.

Another dramatic example occurred in late January, when GameStop stock soared after a buying spree organized by retail investors willing to shield the video game store from hedge funds betting against it.

GameStop’s stock has since fallen, but the incident cast an unflattering light on online trading sites and speculative investment funds that were caught up in the financial quagmire.

In the case of Archegos, major banks appear to be on the verge of suffering significant losses as a result of billions of dollars in sudden stock liquidations by a fund with significant market exposure but little cash.

Then there was the slew of SPACs (special purpose acquisition companies), which entered the public market through transactions with less restrictions than conventional stock offerings.

All of these examples demonstrate how a flood of liquidity following accommodative monetary policy is transforming Wall Street.

“Stocks have risen extremely quickly from their lows last March, but there is still plenty of liquidity out there,” said Gregori Volokhine of Meeschaert Financial Services.

The Federal Reserve has been pouring money into the financial system at a rapid rate. In addition, both President Joe Biden and his predecessor, Donald Trump, signed broad fiscal packages that provided funds to households and companies.

“I just don’t know that we’ve seen this much money hit the system this fast between what we’ve seen in stimulus checks and now what we’re going to see with infrastructure,” said TD Ameritrade market strategist JJ Kinahan, alluding to Biden’s just-introduced $2 trillion infrastructure plan.

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Part of the uncertainty is due to investors attempting to manage market changes as the economy recovers and more people are vaccinated, while technology stocks that thrived during the lockdowns lose some of their luster.

“Enterprising investors know they need to find other vehicles besides software, social networks and e-commerce stocks,” Volokhine said. “They’re looking for ways to make more money.”

When funds are “looking to distinguish their returns, which is harder to do in a bull market,” according to Kinahan, implosions like Archegos can happen.

– Is there a new regulation? –

The market’s turbulence has prompted calls for more financial oversight. Following GameStop’s demise, lawmakers have grilled Robinhood, an online trading site, about its decision to temporarily halt trading during the craze.

Robinhood, which expects to go public in the near future, has also been questioned about its dealings with hedge funds.

Wall Street

The Archegos fiasco has ignited a discussion about swaps, which are derivative transactions that allow massive, high-risk bets to be made with small upfront payments.

According to Volokhine, the swaps market’s opacity makes it a prime candidate for new rules from the Securities and Exchange Commission.

“The SEC could move quickly to force banks to disclose more about swaps,” he said. “Right now, there isn’t much transparency.” 

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