Loyola University Chicago School of Law, JD 2023
The Bears of Wall Street have always used their paws to swipe down on financially weak companies by further driving down their stock price. However, the Bulls, recently led by retail investors and Wall Street Bet users, have begun thrusting their horns up into the air to lead an attack on bearish institutions by forcing them to buy back the “Stonks” that they shorted. This stock trading phenomenon, backed with the subjective ethical obligation to protect the little guy on Wall Street, is called the “The Short Squeeze.” While the Bears’ strategy of short selling stocks in the financial market faces public criticism, it is entirely legal. Therefore, financial regulators should encourage these millennial Bulls to take precautions in understanding the legality of trading strategies in the free market.
What is “Stonks” in the first place?
The word “Stonks” is used for the stocks that have begun increasing in value due to pure investment momentum, rather than corporate health. GameStop, AMC, Nokia, and BlackBerry are some of the significant “Stonks” that Reddit users have targeted. In addition, Wall Street Bet users on Reddit have classified certain stocks as “Stonks” due to their high short interest ratio by hedge funds. Reddit users are mainly young investors who continuously post their uncredited due diligence about publicly traded stock and are commonly associated with the stigma that they are basing their trading decisions on their gut instinct instead of by financial analysis. This aggressive trading tactic portrayed by the Wall Street Bet Army has even brought notice to The Oracle of Omaha, Warren Buffet. The Chairman and CEO of Berkshire Hathaway has commented on the strategies of these millennial investors by analogizing that these inexperienced day traders are using retail brokers, such as Robinhood, as a casino by placing these aggressive short-term market bets. However, these investors are not gambling at MGM Grand. They are betting against the most powerful trading house of the entire world, Wall Street.
The short squeeze: the bears kryptonite
The bears sell the borrowed stock, hoping to buy the shares back at a lower price and secure profit. It is considered a risky strategy because while the stock price can’t fall more than 100 percent, it can go up indefinitely, causing potentially infinite losses. The squeeze occurs when short sellers respond to a share price jump. The share price jumps due to the bulls’ acquiring stocks that have a high short interest ratio. The short sellers must respond by buying back stock they have sold to keep their losses from increasing. But the bullish investors on Wall Street Bets have come together to increase volumes of certain stocks and holding their positions as the price continues to grow. In essence, showing that the individual investor has much more leverage and power against the major financial institutions who engage in “Bearish” trading strategies.
Short selling may be unethical, but legal
When you look at the definition of a short-sale, it may be portrayed as unethical because the investors are betting against the economy. Inexperienced investors often conflate ethics with legality. Shorting a company is entirely legal. The rebellion by Wall Street Bet investors is clearly aimed at targeting very large financial institutions who have the ability to short sell millions of shares, which in turn would cause financially weak companies to go bankrupt. It seems the goal of the Bulls is to prove Wall Street wrong and to hold their ground that the individual investor has more power to control the market than these major financial institutions. However, the distinction between ethical obligations and the legality of different trading strategizes should be more transparent to inexperienced investors, as financial regulators should encourage these investors to take precautions in understanding the legality of different trading strategies in the free market.
Securities Act mission of informing investors
No matter which “Stonks” are building momentum through retail investors, the Securities Act of 1993 is still the standard. The Securities Act of 1993 is the federal law that requires that securities sold to the public be registered with the SEC and that complete information about the seller and the stock offering is made available to investors. One of the main responsibilities of enforcing securities laws is to ensure that investors are educated and have proper guidelines to navigate complicated federal and state regulations regarding trading stocks. More importantly, the role of market regulators should be focused in providing transparent guidelines involved with the risk of trading within a particular strategy. It seems that in both bullish and bearish markets that their strategies can both be showcased as acceptable. Uninformed, millennial investors, can organize to push a stock price up in order to harm the Wall Street institutions, while it is also equally as acceptable that more advanced investors use market mechanisms to benefit from cynical beliefs. This enforcement of the law will continue to inform the Bulls and Bears of Wall Street about appropriate trading strategies and when and how the complicated regulations could impact the way they trade on the market and how these investors understand the legality of their trades. Overall, when it comes to the ongoing battle between the Bulls and the Bears, there is a strong likelihood that the ethical obligations for their trading strategies will continue to raise concerns of consumers and investors. Still, these strategies are entirely legal and are available to all investors on the stock market.