What You Need to Know
- Stock market regulation may change after the recent collision between social media and finance.
- FINRA is looking closely at broker-dealer platforms and the individuals who trade on them.
- Cutting the time to clear a trade to T+1 could have prevented problems seen over the past month or so, experts say.
As regulators investigate what’s become known as the Reddit GameStop squeeze, industry officials are prognosticating how the rules that regulate the stock market could change after the collision between social media and finance.
One potential outcome: the Securities and Exchange Commission could move to a T+1 settlement date for securities transactions from the current T+2.
While the investigations ensued at press time in early February, retail investors also were filing lawsuits against Robinhood and other brokerages like Charles Schwab and TD Ameritrade for “restricting trading” in GameStop and other stocks, and lawmakers planned hearings on the issue.
A hearing to be held in mid-February by the House Financial Services Committee was dubbed: “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.”
The events of GameStop and “this massive collision of the world of finance and social media did unveil and flush out some inefficiencies that we have in our marketplace that I think the [SEC]…” as well as the Financial Industry Regulatory Authority, the Depository Trust Co. and other agencies “are going to have to look at longer-term,” said Jim Toes, president of the Security Traders Association, in an early February podcast held by STA.
Right now, however, “all the industry wants … is [for regulators to]: ‘Get in, do your investigations,’” Toes said. “If bad people did bad things, punish them, and then give us a report.”
Thomas Balcom, founder of 1650 Wealth Management in Fort Lauderdale, Florida, told me in an early February email message that the SEC “should probe the trading of GME since there could be instances of a ‘pump and dump’ scheme akin to boiler rooms in the late ‘90’s. This impacted both large and small investors alike. If there were crimes committed, folks should be prosecuted.”
In a Jan. 27 note to clients, Balcom explained that GameStop’s stock price skyrocketed because “retail investors who congregate in chat rooms on websites, such as Reddit, have mounted a concerted effort to hurt hedge funds and investors who short stocks.”
Balcom told his clients that they do “have a modest exposure to GameStop. GameStop is a component of the Russell 2000 (U.S. Small Cap) Index. Nearly all of our clients own one or two market linked notes tied to the Russell 2000 Index.”
Who Are the Players?
In an early February interview with CNBC, Amy Lynch, founder and president of FrontLine Compliance, said the SEC, FINRA and the Commodity Futures Trading Commission are “very busy right now trying to determine who the players are.”
The SEC, said Lynch, a former SEC examiner and special investigator at FINRA, is “coordinating with exchanges to see what is happening with the trading activity in these issuers. FINRA is taking a look at the broker-dealer platforms and the individuals that own accounts that are trading on those platforms.”
And the CFTC, she said, has “oversight of the options market.”
While “we know the targets are the hedge funds … we don’t know who the players are on the other side; in other words, who are these traders in the chatrooms that are pushing out the shorts and squeezing [the hedge funds] out?” Lynch said.
She added: “It will be interesting to see if they are the Robinhood-type traders (are individual retail traders) or if they are professionals … professionals trying to push out the competition, then you have a very interesting case for the regulators to step in with enforcement action against those individuals.”
Matthew Bacon, an advisor with Carmichael Hill in Gaithersburg, Md., told me in an early February email that the WallStreetBets “Reddit thread should ABSOLUTELY be investigated.”
Stated Bacon: “I wouldn’t be surprised if some of the posts came from hedge funds or other institutional players. [Former MassMutual advisor] ‘Roaring Kitty’ is a CFA with some serious investing chops but not a representative of a major institution playing the short squeeze. The investigation should focus on who is attempting to lead the retail market.”