While Exchange-Traded Funds (ETFs) were introduced in the early 1990’s, the investment product skyrocketed in popularity throughout the 2000’s. In fact, only one ETF existed in 1993 before the market subsequently expanded to 102 funds in 2002, and then to 1,000 funds by 2009. There currently exists more than 7,602 ETFs globally, and their popularity among investors has prompted the creation of numerous other Exchange-Traded Products (ETPs). While ETFs are the most prominent form of ETPs, fund issuers have introduced a myriad of products that vary in terms of volatility, complexity, and investor suitability. Hence, regulators and financial professionals have continued to warn the investing public of the risks involved with purchasing complex ETPs, such as single-stock ETFs, without sufficiently understanding how the products operate.
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.
Failing video game company, Gamestop has broken the internet this week, but not for anything that they intended to do. Their stock has been the center of controversy after a group of internet investors banded together to outsmart hedge funds at their own game. By causing a hedge fund to short squeeze their investment in Gamestop offerings, they have brought to light the possible need for regulation in the market.
GameStop started 2021 with a stock price below $20 but saw its stock price skyrocket to well above $300 a share towards the end of January. The rally would be hard to explain by solely relying on the company’s financial reports or underlying fundamentals. Instead, the rally has to be explained through a combination of external factors involving a popular fintech company’s app, manic speculation by retail investors, and Reddit. Although at first glance this may seem like a new phenomenon, the same factors have been at play for years with a huge interest in Tesla and Bitcoin – and they pose a risk to the markets that regulators and Wall Street together can’t ignore.
Tesla satisfied the final requirement to join the S&P 500 when it announced its fourth consecutive quarter of profitability on July 22, 2020. As a result, investors speculated that the electric car maker would be added to the index in short order. However, on September 4, 2020, the U.S. Index Committee, the group responsible for managing the index, announced the addition of three new companies without mentioning Tesla. The news led to a 21% decline in Tesla’s stock price, the largest drop in the company’s history.
In September 2017, United States economic markets implemented swap-regulating rules to reduce risk to U.S. investment firms. Signed into law in 2016, this regulation curbs the risk associated with swap derivatives in the United States. The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Financial Conduct Authority, and the Federal Housing Finance Agency (the “Agencies”), constructed a joint rule requiring taxpayer-insured banks and financial institutions to collect greater collateral and provide greater transparency when involved in swap derivative agreements.