Loyola University of Chicago School of Law, JD 2022
The controversy surrounding the unprecedented movement by retail investors and Gamestop has not died down in the last month following the stock’s meteoric rise in price and dramatic fall. The wildly volatile stock has lost hedge funds millions and resulted in retail investors gaining and losing spectacularly as well. But the question still remains, is this an issue requiring regulatory intervention?
Is this a regulation issue?
The principle behind securities law and regulations is a bar on misinformation, such as false public statements and manipulation schemes. Manipulation schemes fall under this umbrella of misinformation because participants’ market decisions supply information about perceived value. As such, so long as the buyers of Gamestop stock have not made materially false statements, then there would have been no fraudulent acts in violation of securities law and regulations. Thus, in theory, the market will correct itself to balance out gains and losses and more regulation wouldn’t be necessary to correct what was fair exchanges in the market.
Next steps in regulations
Despite there being no sign of fraud, there have still been persistent calls for the Securities and Exchange Committee (“SEC”) to take steps to regulate trading by retail investors to help prevent another Gamestop-type situation. One proposal is to establish a barrier to public market participation by requiring a license or some other certification. Despite it being undemocratic and elitist, such a policy would limit market gains to professionals and wealthy players.
Another proposal was to limit messages posted online that urge retail investors to buy a specific stock. This proposal had already been criticized for violating the First Amendment right to free speech. The proposed regulatory changes that the SEC could take seem endless but there has been no clear indication of whether the SEC will actually establish or change any of their current regulations in response to the Gamestop controversy.
But the SEC isn’t the only regulatory body being brought under scrutiny in these proceedings. The Financial Industry Regulatory Authority (“FINRA”) has also been pulled into the discussion over regulating retail investing and platforms such as Robinhood. In a letter to FINRA’s CEO, Senator Elizabeth Warren asked how the agency would respond to Robinhood’s role in “recent market volatility, it’s decision to cut off customers’ trading, and the broader concerns about market fairness that these events represent.” The agency responded vaguely by agreeing with the SEC that “this is a dynamic, expanding, and ever-changing marketplace, and that it is our responsibility to consider whether existing protections can be improved.”
Congressional hearing concerning the Gamestop frenzy
A Congressional panel convened in February to address the Gamestop frenzy and whether Congress should take action in response to the situation. The panel questioned Robinhood CEO Vlad Tenev about the halt the retail investing platform put on trades at the height of the Gamestop surge. Tenev defended the halt, blaming a lapse in communication between the company and its customers in describing Robinhood’s failure to have enough capital on hand to cover collateral requirements for the trades.
These hearings have also been criticized for the hypocrisy exposed during the discussion surrounding market regulations and retail investing. As one critic summarized, the discussion included “blaming free-market actors for making money off acts that are legal, and also suggesting at times that regulation was the cause of the harm that was done.”
Another proposal for the SEC to help prevent some of the problems that the Gamestop situation exposed is to reduce the settlement period and allow trades to be made in real time. Tenev cited this rule as one of the ways that the halt on retail trading could have been avoided not only by Robinhood but by other retail investing platforms as well. It seems unlikely that the SEC will revisit this rule, despite being scheduled to do so in 2020, as the commission seems more interested in policing FinTech companies like Robinhood’s individual actions than addressing the larger market wide, regulatory concerns.
A number of other regulatory changes were proposed during the Senate hearing including: a tax to discourage risky trading, payment for order flow, and a 21-plus regulation. The only real conclusion that came from this hearing was that there is no clear regulatory path forward.
Where does the regulation of retail trading go from here?
As one article poignantly noted, “perhaps we should recognize that the term ‘abuse’ can be used to characterize lawful conduct that causes the ‘wrong’ party to lose money,” which seemed to be an apt summary of the controversy surrounding the Gamestop situation. It also helps explain why determining what changes, if any, need to be made to regulating retail investing has posed such a struggle for lawmakers and regulatory agencies.