A panel discussion hosted by Thomson Reuters discussed the recent debate over investor activism springing up in online trading platforms and internet chat rooms
The recent high-caliber war between professional investors who were making a short selling play on a number of well-known stocks and a cadre of amateur investors from a Reddit subgroup known as “r/Wallstreetbets” grabbed a fair share of headlines.
The amateur investors, using the mobile-friendly trading app, Robinhood among others, pumped up the value of some of the stocks the professionals — mostly high-profile Wall Street hedge funds — were shorting, such as Gamestop, BlackBerry, AMC, Nokia, and Bed Bath & Beyond. This strategy creates a “short squeeze” that can cripple the short sellers’ play.
The financial fistfight left Robinhood itself heavily criticized after the platform restricted the purchase of GameStop stock, citing issues with volatile stock and regulatory requirements. The move upended the amateurs’ strategy, raising issues of market interference and unfairness.
In a recent online panel discussion hosted by Thomson Reuters, Banding Together: Reddit, Robinhood and Regulatory Response to Market Populism, several experts discussed the challenges inherent in this situation and what made this scenario different. They also engaged in an important question on the gamification of trading apps — Is it a gateway to attract younger, more diverse investors? Or is it a Las Vegas-style ploy with potentially serious consequences for unseasoned traders?
David v. Goliath
The events that led up to the GameStop bubble have been likened to a David vs. Goliath scenario. In this case, David — a group of mostly young, mostly amateur traders coordinating on online message boards — was beating Wall Street at its own game. While this makes for a great narrative, it has its flaws, panelists said. “Trying to figure out retailers investors’ motivations is pretty difficult,” says panelist Jennifer Schulp, Director of Financial Regulation Studies at the Center for Monetary and Financial Alternatives at the Cato Institute.
There are thousands of people with individual motivations, Schulp says, and while that makes for a really good story, there was a lot more at play.
Another panelist, Steve Sosnick, Chief Strategist at Interactive Brokers, agrees, saying the “Davids” weren’t all amateur retail investors. “Once you get momentum moving in a stock situation like this, institutional traders jump in,” Sosnick adds. “There’s a whole ecosystem of institutional types such as hedges funds who jumped in at the right moment.” What may have started as a David and Goliath scenario became a meme unto itself, ending up as Goliath versus Goliath, with the “big guys” fighting it out, panelists explain.
So, what role should regulators or lawmakers play, if any? Paul McCurdy, Partner at Katten Muchin Rosenman, thinks the David and Goliath sensationalism makes it all the more interesting and challenging for legislators and regulators to grab hold. “It’ll be interesting to see if one of the 50 states weigh in on it and come up with whatever they are going to regulate,” McCurdy says.
But with so many aspects of the securities business in play here — beyond the simple buying and selling of stocks — the ramifications of Robinhood and Reddit will be felt over time, including rethinking the short squeeze and the settlement period for stocks.
The gamification of trading
Trading platforms like Robinhood argue that by not charging a fee upfront, they are making investing more affordable and easier for everyone, enabling a vast democratization of the securities market. Critics counter that, saying such easy access encourages risky, if not reckless, behavior that ultimately hurts retail investors.
Cato’s Schulp believes this more open access to the markets is a good thing, citing studies that show that it opened the market to more diverse investors including those who were lower-income, younger, more diverse, and had not typically owned stocks in the past. “Having people have access to the markets is a great way for them to grow wealth,” she says. “It’s a way we can start talking about decreasing wealth gaps among populations.” This access does come with some risks, Schulp acknowledges, adding that she believes people can start learning how to make good decisions in the process. Either way, we should be careful about too much regulation in this space, she argues.
Indeed, apps like Robinhood have been criticized for making their user interfaces more like video games, with digital confetti raining down on the screen when a user makes a trade. Congress and regulators have criticized Robinhood specifically for “aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent frequent outages and disruptions on its trading platform.” Robinhood has since replaced the confetti with geometric shapes, but the question remains, is this helpful or harmful? Should there be rules against it?
McCurdy of Katten Muchin says that confetti is not explicitly illegal under the Securities Exchange Act of 1934, which prohibits certain types of conduct in the markets. He also disagrees with the ongoing inquiry by Sen. Elizabeth Warren (D-Mass.) into a possible violation of advertising laws, citing that advertising rules are well-defined. McCurdy says he doesn’t see a connection between how creating fun in the trading environment can be a violation of the rules or give rise to a GameStop-like event. “I don’t think confetti does it,” he adds. “I don’t think confetti is illegal, and I don’t think it is dangerous.”
Panelist Sean Burstyn, Principal at the Burstyn Law Firm, disagrees, arguing that gamification makes an appreciable difference in an individual’s tolerance level. “There are psychologists behind all of these tools, they’re made to be addictive,” Burstyn explains. “It’s no different than any social media sites that we spend a little bit more time on than we want.”