The U.S. Congress recently embarked on a series of GameStop hearings to explore the facts and consider the possible policy responses to the volatile trading and market disruptions that dominated market news and regulatory chatter stemming from the “meme” stock-trading mania. We hope that the important takeaways from this episode are not lost in the noise and that Congress stays focused on several important market integrity and investor protection matters that need attention.
Investor protection. First, investor protection must be reconsidered in the context of a social media/gamification world. How often do we have a case study like this: pandemic-quarantined day traders, in a gamified system, operating on a frictionless trading platform (aka Robinhood)? Add to this a social media narrative promoting an individual stock with huge position imbalances, and we have a perfect storm.
A knee-jerk – and ill-advised – reaction would be to think we can regulate time-honored speculation and behavioral aspects of markets. A more appropriate response would be to ensure that new social media dynamics do not overshadow or replace investor protection rules currently in place. Social media runs have now fully demonstrated their ability to disrupt normal market activity, and we should question if retail investors are adequately protected, particularly regarding margin and option trading.
Infrastructure. Second, the adequacy of our market and trading infrastructure should be reassessed. Congress should ask whether a social media-driven throng disrupting trading and potentially the broader market is a new risk or a one-off. To market professionals, short squeezes, zero-commission trading, market imbalances, day trading and highly touted stocks are well-known phenomena. What is clearly new is the speed and potential size of a social media-inspired run. Whether our market infrastructure and our rules for broker, clearing and margin risk are adequate and agile enough must be top of the list for a congressional inquiry.
Market manipulation. Third, Congress should examine whether social media collusion and narratives extend into the realm of market manipulation or fraud. While industry insiders are worried about that, the populist view holds that social media tools have leveled the playing field.
As the global leader in educating professionals on financial analysis, CFA Institute takes the view that few things are more important than the independence and freedom of opinion that are the basis of free markets, coupled with sound fundamental analysis. What is unnerving is the combination of traditional analyses with potential misinformation and the horsepower of social media to drive momentum in a particular stock. The financial services industry must acknowledge that the so-called democratization of trading markets is upon us and arguably, collective opinions – and actions initiated on the basis of those opinions – emerge faster than our existing market infrastructure can support. Therefore, the important regulatory question is whether this new force is free market expression at the speed of sound, or whether and when it tips into a realm of new-age manipulation and misinformation.
Long-standing market policy debates. Finally, what is squarely in Congress’ lane are many market-related policy debates that have been reignited by the GameStop episode. Taking heed of an old adage — “don’t let a good crisis go to waste” — various politicians, regulators and market observers have taken the opportunity to resurface long-standing policy debates on payment for order flow, T+2 settlement delays, short-selling transparency, rules on margin and options trading and whether a revamp of securities lending/short-selling rules should be considered.
As the U.S. Congress considers the appropriate policy response, congressional lawmakers should prioritize investor trust in our markets, ensure market information integrity and sound market structure. They should focus on the immediate steps above, before choosing which of these issues are ready for prime time. Our capital markets depend on it.
Margaret Franklin is the CEO and president of the CFA Institute.
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