Baruch Stein: GameStop affair shows need for better regulation

Despite discussions about “common people outmaneuvering Wall Street,” the GameStop affair harmed many of those who think they beat Wall Street and illustrates the need for better regulation.

Keith Gill, the man behind the affair, is himself a professional financial adviser who used the GameStop rally to turn an investment of more than $750,000 into a holding that at one point was worth almost $48 million, and many people are suffering because of it.

A “pump and dump” is when a person manipulates stock prices, often by creating fake news about some new technology a company is falsely reported to be developing. Others rush to buy stock in the company, causing share prices to inflate. The first person sells at inflated prices and when it turns out that the company is not in as good a position as reported, the price deflates again, leaving those who bought at inflated prices with losses.

Instead of fake news, Gill used social media to mobilize a large number of buyers to inflate GameStop’s stock price. The rally forced short sellers to join the buying, inflating share prices further. This contributed to marketwide declines in the last week of January when some people, especially GameStop short sellers, sold other stocks to cover GameStop losses.

Many common people’s savings are in stock-related accounts, sometimes in managed funds whose connection to the stock market they might not be fully attuned to. When markets become unnaturally volatile, we lose the ability to intelligently understand market behavior; managing a retirement or college savings account becomes impossible, and everyday people stand to lose everything.

Gill’s ability to mobilize a large number of people was largely based on the fact that they did not view themselves as attaching themselves or their finances to a company in any significant way or for any significant period of time. They were buying with the expectation that they would quickly sell at a profit.

The founder of WallStreetBets, the social media venue Gill used, has been quoted saying, “What (WSB investors are) doing is not investing … . They’re using the stock market like a casino … .” Betting is different from investing, though. Wall Street is not meant to be a casino, and having it become one is destabilizing to the economy.

One thing that impacted Gill’s ability to manipulate the market was common individuals’ increased access to stock markets facilitated by low-cost, do-it-yourself platforms like Robinhood, whose popularity has grown. Increasing access is a good thing overall, but with new realities, there have to be new regulations to protect against abuse.

Day trading is perhaps as old as the stock market, but increased access increases the prevalence of the phenomenon and contributes to the transformation of stock markets into casinos, increasing the level of unnatural volatility. There are rules that limit day trading, but the GameStop affair demonstrates that existing regulations are not enough.

Traders should be prohibited from selling a stock for 72 hours after they buy it. Furthermore, short selling is an inherently risky endeavor, and while it does not need to be forbidden to individual investors, short selling should be prohibited to managers of pooled funds and institutions operating with the money of their shareholders and clients.

Some have proposed using transaction taxes to deter high-frequency trading, but taxes would deter market access for low-budget actors, which is not what I would like to see done. I only want to see safeguards against irresponsible and destabilizing behavior. A tax would be shrugged off by wealthy actors who would just continue the behaviors we need to prevent and would be able to dominate markets lower-budget actors would be excluded from.

Were day trading prohibited, day traders might pull their money out of the markets which, in the short term, would reduce the amount of capital available to corporations looking for financing. It could have a significant impact on options markets, which day traders often rely on to reduce risk exposure. It would also mitigate legitimate reactions to real developments like a company’s success or failure in developing new products. In the long term, increased stability and predictability would make investing safer and benefit markets by increasing investor confidence.

The GameStop affair demonstrates that we have arrived at a point where illegalizing day trading and institutional short selling is necessary.

Squirrel Hill native Baruch Stein is a writer living in Jerusalem.