As you probably heard by now, some crazy events have been happening in the stock market. Stocks like GameStop and AMC shot up in value due to a short squeeze caused by retail investors going against institutional investors. The stock volume and demand were so high that trading froze a few times for GameStop because there weren’t enough people on the other end selling their shares to meet the new demand for the stock.
Then, Robinhood, Webull and other brokerages halted retail traders from buying these highly volatile stocks. Users are claiming that these apps are price manipulating according to the Securities and Exchange Commission (SEC) rules. When they restrict users from buying the stock, the demand goes down; then, the price of the stock decreases, too. There has been a class-action lawsuit filed against Robinhood since this app seems to be at the forefront of this event.
This is historical for a few reasons
A power shift
Why is the GameStop event significant? It shifted the power away from these large institutional investors to small retail investors and groups such as WallStreetBets. The little guys have the power now to move markets and build demand for stocks, which the large funds and institutions don’t like one bit. Even if you haven’t been a part of this trend and invested in GameStop and AMC, it’s been extremely entertaining watching this all happen. However, there might be unintended consequences that people might not be expecting, which in turn might make things more difficult for retail investors to trade in the near future.
Hedge funds will step up their game
The way institutional investors view the market will definitely change. Hedge funds have a lot of money, which is a huge advantage compared to small retail investors. Before 2021, hedge funds didn’t pay attention to social media outlets like Reddit. Now, these institutions can make an algorithm tracking social media groups so they can adjust their investments according to what people are saying about stocks.
New rules for stocks
Nothing is set in stone, but many people are worried that Congress or regulators like the SEC are going to set up new rules intended to help the current situation or prevent something like GameStop-Gate from happening again.
Ultimately, the big institutional investors will be able to find loopholes that retail investors won’t be able to use or find. It’s even possible that regulators will take the side of the big institutions instead of the small retail investors like you and me.
The SEC would do this by taking a more protectionist approach and outright ban retail investors from trading options. This unprecedented event with GameStop started with retail traders buying many call options, and the price of the stock shot up. So, to prevent that from happening again, they would just allow the big boys to play with options.
Another way the SEC might prevent similar situations is by possibly limiting the amount of shorting people can do on one stock. Instead, people would only be able to short up to 100% of a stock instead of 130% like with GameStop.
New regulations = fewer players
These are just possible consequences. However, history has shown that more regulations – even if they have good intentions – usually allow only a few players to play the game, and that’s usually the big players. For one, when regulatory and congressional actions are taken to regulate something, big companies usually have a seat at the table. Or the regulators themselves are often industry insiders helping make the exact rules that are regulating them. As a result, they know all the loopholes and other means to achieve their goals to stay on top. Plus, there is the worry of corruption; institutions could buy off the people making the rules so that the new rules favor Wall Street.
We can’t let the solution become another problem.
Big institutions still have the advantage. They have enough money and lawyers to find a way to make the new rules work for them rather than against them, while the little guy doesn’t have the same ability to play by the new rules. Unintended consequences that end up working for the big institutions aren’t ideal. However, that doesn’t mean we shouldn’t still try to fix a broken system. We just have to be careful how we go about changing it. We don’t want to end up doing the opposite of what was intended, especially after all the retail investors tried so hard to expose what is wrong with the institutional investors and the system.