Gary Gensler has not even been confirmed yet, but the choice of President Joe Biden to head the Securities and Exchange Commission will come at the helm as a growing storm threatens to subdue small investors.
The retail investor craze for GameStop and a handful of other struggling companies continued unabated in the second week, facilitated by online trading tools that let unsophisticated investors make a complicated, leveraged bet and filled by a seemingly grassroots network of day traders.
The SEC said in a statement on Friday that it was closely monitoring and evaluating the extreme price volatility of certain equities’ trading prices, adding that volatility could expose investors to losses and undermine market confidence. “We will act to protect retail investors when facts show insulting or manipulative trading activity,” the agency promised.
There is a kind of general agreement among legislators and market observers that ‘someone should’ do something ‘, but little consensus on what or who – or even or any laws have been broken in a volatile week for equities. While some have suggested that other financial rule authorities, such as the Consumer Financial Protection Bureau, may be involved, there was a feeling that institutions such as the Treasury Department and the Federal Reserve remain above the fight.
Ben Koltun, director of research at Beacon Policy Advisors, a policy research advisory firm, expressed doubts that Biden’s newly confirmed treasury secretary, Janet Yellen, would weigh the situation – at least in its current scope and scope. “I do not think it has risen to the systemic level that would involve Yellen’s active participation,” he said. “As long as it stays a little more silent, I think Yellen’s attention will stay elsewhere.”
Matthew Nielsen, a partner at Bracewell LLP’s law firm, said: ‘What we currently have is a limited group of companies experiencing this unusual trade. If it starts to expand further, you can see the treasury. .. but they look more at the bigger economic picture. The SEC is limited to what it can do … even if the trade appears to result in an unrealistic share price. ‘
Philip Moustakis, an attorney at Seward & Kissel LLP and former senior attorney in the SEC’s enforcement department, said: “I think it’s remarkable that the SEC did not suspend trading in GME. [GameStop] or any other of the tickets involved to date. It does not lie in the SEC’s DNA to suspend trading due to an indication of misconduct. ‘But he added that it would be reasonable to assume that the Division is investigating Application.
Tyler Gellasch, executive director of Healthy Markets, an investment group for investors, said: ‘The prices we see for all types of assets – not just those in public equities – have a very loose relationship with what someone is reasonably fundamental to. value. But are prices manipulated? “
Gellasch said there are ‘weaknesses in regulation exposed by these events’, such as a lack of clarity on how market players are encouraged and compensated. He said the SEC should review the capital and required requirement for trading institutions and consider revisiting or strengthening the handrail to protect retail investors.
Many market experts blame the spread of commission-free, app-based platforms that offer complex financial instruments to investors, regardless of their experience.
Many people blame the proliferation of commission-free, app-based platforms that offer complex financial instruments to investors, regardless of their experience. Barbara Roper, investment protection director of the Consumer Federation of America, said she hopes the SEC’s will investigate the excessive ease with which individuals are able to trade risky options and whether we need to restore some friction to the system. . ‘
Mazi Bahadori, chief compliance officer and vice president of securities at Altruist, a technology platform for financial advisers, said: “There is a game taking place on Robinhood that is provoking a lot of volatility.”
Two areas that could be of potential interest to security regulators could be the role that social media plays in strengthening and distorting market information, along with the compensation structure of online brokers like Robinhood. “The SEC is about protecting retail investors,” Koltun said, adding that it could manifest itself as a better disclosure requirement for groups like Robinhood. ‘
Robinhood, which does not charge commissions for transactions, earns its money through payments for order flows, a term that refers to trading transactions to a larger financial entity to execute in exchange for a small payment per trade. Advocates for consumers have raised questions about whether commission-free platforms that earn this way are sufficiently transparent about the process.
A business model that relies on this revenue stream also provides the platforms as an incentive to encourage customers to trade regularly. ‘It’s not a buy-and-hold [model]”Bahadori said.” They earn money to make orders flow, which is why it is very important for Robinhood that customers trade regularly. “
“It is in Robinhood’s best interest that customers trade regularly.”
Legal experts said the SEC would likely want to investigate who or what caused the sharp rise in GameStop’s share price and who plucked the windfall from the rise, predicting regulatory enforcers will look for evidence of coordination between some of the harder voices on social media urging investors. to pile up in GameStop and that they will investigate whether the de facto investors influencers spread misinformation.
“Is it really the result of a bunch of individuals thinking together, and group thinking, or was the spark for it from someone who wanted to manipulate the stock? … It’s not hard to believe that someone lit the fire there that benefited would not stretch trading in a stock that is apparently not supported by the fundamentals of the company, “Nielsen said.
Moustakis said: “If this is really the mania of the crowd, it is difficult to see what theory of market manipulation will be available to the enforcement staff. On the other hand, the price of GME share seems completely separate from any reasonable measure of corporate value. “
Michael Munger, a professor of political science at Duke University, argued that the emergence of GameStop stocks, which are not established by any fundamentals of valuation and are driven by a self-sufficient subgroup of social media users, is market manipulation. is similar to the tactics used in pump and dumping schemes and that it should be pursued as such.
“There are a lot of people who are openly advocating for others to buy the shares for the explicit purpose of increasing the price through collusion. It’s illegal, period,” he said. “The symbolism of the persecution of some heads will be enough to discipline future groups to do so.”
Munger draws a parallel between the pursuit of revenge against hedge funds and the populist, anti-government sentiments that fueled the uprising in the country’s capital on January 6.
“In a way, it’s like the Capitol riots – a populist group is adopting elite institutions,” he said. ‘You could say it was a protest action or something about little guys versus big guys, [but] it’s illegal, and has always been so, if you take away the populist and symbolic rubbish. ‘