Gary Gensler has yet to be confirmed, but President Joe Biden’s choice to lead the United States Securities and Exchange Commission will take over as a growing storm threatens to flood small investors.
The retail investor craze for GameStop and a handful of other struggling companies continued unabated in its second week, facilitated by online trading tools that allow unsophisticated investors to place complex, leveraged bets and spurred on by an apparently popular network of day traders .
The SEC said in a statement on Friday that it is “closely monitoring and assessing the extreme price volatility of certain stocks”, adding that the volatility could expose investors to losses and undermine market confidence. “We will act to protect retail investors when the facts demonstrate abusive or manipulative commercial activity,” the agency promised.
There is a kind of general agreement between lawmakers and market watchers that “someone” must do “something”, but there is little consensus on what or who – or even if any laws were broken in a volatile week for stocks. While some suggested that other financial regulators, such as the Consumer Financial Protection Bureau, could get involved, there was a sense that institutions like the Department of the Treasury and the Federal Reserve remained above the fray.
Ben Koltun, director of research at Beacon Policy Advisors, a political research consultancy, expressed doubts that Biden’s recently confirmed treasury secretary, Janet Yellen, would weigh in on the situation – at least in its current size and scope. “I don’t think it has risen to the systemic level that would involve Yellen’s active participation,” he said. “As long as it remains a little more isolated, I think Yellen’s attention will continue elsewhere.”
Matthew Nielsen, a partner at the law firm Bracewell LLP, said: “What we have now is a limited group of companies that are experiencing this unusual trade. If it starts to expand beyond that, you can start to see the Treasury enter it. … but they are looking more at the broader economic picture. The SEC is limited in what it can do … even when the deal apparently results in an unrealistic share price. “
Philip Moustakis, a lawyer at Seward & Kissel LLP and a former senior adviser to the SEC Enforcement Division, said: “I think it is noteworthy that the SEC has not suspended GME negotiations [GameStop] or any other of the tickers affected so far. It is not in the DNA of the SEC to suspend negotiations without any indication of transgression. ”But he added that it would be reasonable to assume that the Enforcement Division is investigating.
Tyler Gellasch, CEO of Healthy Markets, an investor advocacy group, said: “The prices we are seeing for all types of assets – not just those in public stocks – seem to have a very loose relationship with what anyone could reasonably call it fundamental value. But are prices being manipulated? “
Gellasch said there are “weaknesses in regulation that have been exposed by these events”, such as the lack of clarity about how market participants are encouraged and compensated. He said the SEC should review capital and liquidation requirements for trading institutions and consider revisiting or strengthening guardrails to protect retail investors.
Many market experts blamed the proliferation of platforms based on commission-free applications, which offer complex financial instruments to investors, regardless of their level of experience.
Many blamed the proliferation of platforms based on commission-free applications, which offer investors complex financial instruments, regardless of their level of experience. Barbara Roper, director of investor protection at the Consumer Federation of America, said she hoped the SEC would examine “the excessive ease with which individuals are able to engage in risky option trading and whether we need to restore some friction to the system.”
Mazi Bahadori, director of compliance and vice president of securities at Altruist, a technology platform for financial advisers, said: “There is a gamification that takes place at Robinhood that really attracts a lot of volatility.”
Two areas of potential interest for securities regulators may be the role that social media plays in amplifying and distorting market information, along with the compensation structure of online brokers like Robinhood. “The SEC’s goal is to protect retail investors,” said Koltun, saying it could manifest itself as “better disclosure requirements for groups like Robinhood.”
Robinhood, who does not charge commissions for trades, earns his money through order-flow payments, a term that refers to directing trades to a larger financial entity to execute in exchange for a small payment per trade. Consumer advocates have raised questions about whether commission-free platforms that make money in this way are sufficiently transparent about the process.
A business model that relies on this revenue stream also provides incentives for platforms to encourage customers to trade frequently. “It is not a purchase and waiting [model]”Said Bahadori.” They make money from the order flow, so it’s in Robinhood’s interest that their customers negotiate frequently. “
“It is in Robinhood’s interest that its customers negotiate frequently.”
Legal experts said the SEC will likely try to investigate who or what triggered the sharp rise in GameStop’s share price and who reaped unexpected profits from the increase, predicting that regulatory authorities will seek evidence of coordination between some of the highest voices on social media. that encourage investors to stack on GameStop and that they will examine whether those de facto influencers of investors have deliberately spread the wrong information.
“Is this really the result of a bunch of individuals getting together and thinking in groups, or was it the spark for that occurring from someone trying to manipulate the stock? … Isn’t it hard to believe that someone lit the fire there that could benefit from trading an action that doesn’t really seem to be supported by the company’s fundamentals, “said Nielsen.
Moustakis said: “If this is really crowd mania, then it is difficult to see what market manipulation theory would be available to the oversight team. On the other hand, GME’s stock price seems completely divorced from any reasonable measure of Valor corporate. “
Michael Munger, a professor of political science at Duke University, argued that the increase in GameStop’s stock, untied from any valuation fundamentals and driven by an assertively vocal subset of social media users, was market manipulation similar to the tactics used in dump “and should be continued as such.
“There are many people who openly advocate that others buy the shares for the explicit purpose of raising the price through collusive shares. This is illegal, period, ”he said. “The symbolism of prosecuting some leaders will be sufficient to discipline future groups to do so.”
Munger drew a parallel between Reddit’s pursuit of revenge against hedge funds and the populist and anti-government sentiments that fueled the riot in the nation’s capital on January 6.
“In a way, this is like the Capitol riot attack – a populist group faces elite institutions,” he said. “You can say it was a protest or something about the little ones against the big ones, [but] this is illegal, and always has been, if you remove populist and symbolic traps. “