Stories about GameStop have dominated the financial news over the past several weeks. The information is about how retail investors have been driving this and other significant shorts for several hedge fund managers higher. Congress will be holding hearings about this activity and Robinhood and other custodians’ actions to limit trading in some of these impacted stocks.
At this point, it’s hard to say what the impact will be on the industry or individual investors. Here are a few thoughts of what the industry may see:
Increased regulatory scrutiny
As we write this, there are Congressional hearings in process, as well as investigations by other agencies including the SEC and the Department of Justice. These investigations are looking at several things, including:
- Was the short squeeze on stocks like GameStop, American Airlines, AMC Entertainment, and others the result of collusion and market manipulation?
- Did Robinhood and other online brokers unfairly keep investors from trading shares of GameStop and other stocks? Conceivably this could have resulted in some of these investors unable to sell shares that had a run-up in price, causing them to suffer losses or at least reduced gains.
The social media site, Reddit, touted this spike in activity as retail investors beating some major hedge fund investors at their own game, so to speak.
Losses to investors
The news has been filled with stories of small retail investors making profits trading GameStop. Everyone likes to see the “little guy” win, so that’s fantastic. However, while there were undoubtedly some winners in GameStop and other shares involved in the Reddit-inspired trading, investors also suffered losses. Professional traders who watch the markets all day for a living and use sophisticated trading tools suffer losses at times. Still, inexperienced retail investors trying to time the markets shouldn’t expect to win frequently either.
Implications for the industry
At this juncture, many developments are still to come with the Congressional hearings, state and other regulatory and legal investigations ongoing. Some areas that seem to come up in the media include:
- Changes in the trade settlement process. One issue in all of this is the reports that Robinhood limited trading in some of these stocks due to being undercapitalized to be able to front the money for settlement costs.
- The gamification of investing is a concern among some. This event is about these younger investors treating trading like a game versus looking at long-term investing.
- A former MassMutual broker who goes by the online name of Roaring Kitty played a critical role in fueling this trading frenzy on YouTube. There will be inquiries into his role and perhaps to that of MassMutual.
- What role did Reddit play in all of this, and did the social media site act improperly?
Overall there are probably more questions than answers as to the impact of this Reddit GameStop squeeze on the industry, on your practice as an RIA, and on individual investors. One thing our industry can do is continue to educate all investors on the risks of this type of trading activity.