Don’t Derail Small Investors Because of GameStop Furor


This is what the democratization of investing looks like, and it would be a mistake to turn back now.

I have long argued that everyone should have equal access to financial markets. For too long, Wall Street and U.S. securities laws have openly discriminated against ordinary investors, denying them full access to markets on the theory that they’re too unsophisticated to play in the big leagues. That caricature of retail investors as fools and rubes is wildly misguided, and in any event, excluding ordinary investors from markets on that basis is self-defeating. How can they become more sophisticated without access to markets?

Fortunately, markets are opening up, thanks in no small part to trading apps like Robinhood Markets that allow anyone to open a brokerage account with no minimums or commissions. And as the GameStop Corp. saga has spilled into view, retail investors can be every bit as sophisticated as Wall Street. The plotline is well known by now, even if all the details are not yet clear. In a nutshell, a posse of retail traders on Reddit’s WallStreetBets forum spotted that hedge fund Melvin Capital had a huge bet against GameStop. So they bought the stock, pushing the price higher and forcing Melvin to buy shares to cover its short bets, which drove the price even higher. Not bad for a bunch of rubes.  

No one should be surprised. Retail investors now have access to much of the same financial information as Wall Street. Today, a single retail investor with a data feed and a spreadsheet can do the work of 30 Wall Street analysts a generation ago. Retail investors just needed an opportunity to compete. 

But old prejudices die hard, and there are already calls for intervention. On Wednesday, the SEC said it’s monitoring options and equity markets; Senator Elizabeth Warren called on the regulator to do more. Treasury Secretary Janet Yellen and President Joe Biden’s economic team are also keeping an eye on the market, according to the White House. That sounds like the old clampdown on retail investors in the name of investor protection. Massachusetts Secretary of State Bill Galvin was more explicit, calling for a suspension of GameStop’s stock because it’s “dangerous” to investors.

Meanwhile, retail investors are the ones who appear to have the upper hand so far, handing billions of dollars in losses to hedge funds in the process. But it’s ordinary investors who need protection?   

Retail investors are used to the heavy hand of lawmakers and regulators, but they didn’t expect resistance to come from the inside. Robinhood — the flag-bearer of democratization that defiantly tweeted, “Let the people trade” in 2016 — curbed trading in GameStop and AMC Entertainment Holdings Inc. on Thursday, unironically saying in a blog post that it’s “committed to helping our customers navigate this uncertainty.” That came a day after it told users it might close out some of their positions in GameStop and AMC to reduce risk.

There may be legitimate reasons for those moves. The volatility around GameStop, AMC and other highly traded stocks and options forced Robinhood to raise more than  $1 billion this week to bolster its financial condition. But whether Robinhood moved to restrict trading for its own protection or that of its users, the quandary for retail investors is the same: How can they trust trading apps to keep the trades flowing? 

Robinhood isn’t the only one. Online brokers such as Interactive Brokers Group Inc. and Morgan Stanley’s E*Trade also curbed trading on Thursday. But it wasn’t lost on retail investors that hedge funds and moneyed investors had no such restrictions placed on them, which in effect threw hedge funds a lifeline at retail investors’ expense. It also doesn’t look great that one of Robinhood’s investors, the hedge fund D1 Capital Partners, has reportedly lost billions of dollars this month as retail investors have targeted hedge funds’ positions.

If retail investors are uneasy about how all this is playing out, it’s hard to blame them. They’ve been kept out of markets on thinner pretexts. Some are accusing them of market manipulation, but based on the information available so far, it’s hard to see how talking up a trade on Reddit is any different than Wall Street’s hype machine. As billionaire investor Mark Cuban pointedly asked in an email interview with Bloomberg News on Thursday: “How is this any different from an investment bank putting out a call to clients with a price target and calling it a strong buy?”

There also seems to be an unusual obsession with why retail investors are buying shares of GameStop. Maybe they think it’s a good long-term investment. Maybe they want to stick it to hedge funds. Maybe they’re trying to make a quick buck. Maybe they’re just having fun. As long as they’re not breaking any rules, why does it matter?

And after the events of this week, the old saw about retail investors needing special protection seems out of touch. If anything, institutional investors should receive more scrutiny. Ordinary investors risk their own money, whereas institutions are playing with other people’s capital, including in many cases those of pensions, endowments and foundations that invest on behalf of ordinary investors.

Amid the momentary hysteria, it’s useful to bear in mind that GameStop and AMC and the handful of other stocks that have dominated the headlines in recent days are a tiny fraction of the market. Even as their stocks gyrate, the broader market shows few signs of strain. And yes, some people will lose money in all the hoopla, but as any hedge fund will tell you, that is the occasional and inevitable price of investing. It’s also how investors get smarter.

If lawmakers and regulators want to help ordinary investors, they should remind them that it’s probably not a good idea to mess around with stocks like GameStop. But let’s not use this moment to roll back the forces of democratization. Everyone should have equal access to markets.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

©2021 Bloomberg L.P.

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