A raft of market watchdogs has warned investors in GameStop—many of whom are homespun traders using Reddit or Robinhood—may be in danger of breaking the law.
Shares in the video gaming retailer leapt another 68% at end of trading on Friday, while cinema chain AMC, another target for investors, increased by 54%. These figures bucked the stock market at large, which fell 3% this week, its biggest dip since October 2020.
Some digital avenues have already been closed off by authorities, prompting an outcry from traders and lawmakers across the political spectrum.
When Robinhood, a no-fee app that on Thursday declared it had raised an additional $1 billion from backers, prevented users from buying GameStop shares, Democratic Rep. Alexandra Ocasio-Cortez branded the move “unacceptable,” to which Republican Ted Cruz replied, “fully agree” (Ocasio-Cortez then slammed the Texas senator for his role inciting the deadly Capitol storming, telling him: “if you want to help, you can resign).
The US Securities and Exchange Commission (SEC) Friday announced that it would investigate actions that “unduly inhibit” and “disadvantage investors.
“Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes,” the group added. “Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”
“UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking,” said Britain’s Financial Conduct Authority on Friday. “This applies to UK investors trading both US and UK stocks.”
The episode exposes a clear need for financial regulation – not just for small-buy apps such as Robinhood, which has been compared to a Las Vegas loan shark for allowing citizens to gamble vast sums on the market, but for the kinds of hedge funds that attempted to short GameStop shares, causing the backlash.
Imagine, for example, these funds had bet $70bn against a mining company, or a roadlaying firm, or any number of blue-collar industries that have become grist for the mill of populist leaders in the mould of former President Donald Trump?
The entire American coal mining industry employs 53,714 people, according to analyst Statista. GameStop’s workforce alone employs 50,000, while the US video gaming sector at-large employs over a quarter of a million. Should a Wall Street hedge fund short and put out of business a gaming firm, there would be little outcry. But the move would be more devastating to families, and the nation’s workforce.
And GameStop is just one very small piece in a huge, dense puzzle of games retailers, developers, artists, writers and much more beyond. Robinhood may seem an answer to the financial sector’s elitism. But it is no panacea to predatory trading. Only regulation can solve that.