So many issues that expose problems in the retail trading universe were exposed by the whole GameStop short squeeze episode. Here are my thoughts on some of them.
1. Do we need to police investing forums more thoroughly?
The WallStreetBets Reddit group is full of pump and dump schemers who spend time there trying to convince chumps to drive the price up of a stock or option that they want to dump. The "Get Rich Quick Without Working Very Hard" effect overlays almost every post.
I helped manage a forum on CompuServe back in the 90s called "Invest." We vetted every single post within minutes of its arrival, which was a huge pain, to get rid of pump and dump schemes because the forum owner believed he would be liable for losses incurred by members who were taken in. This was prior to Section 230, an amendment to the Communications Decency Act, going into effect in 1996, which was intended to regulate pornography online. The amendment holds individual users responsible for their comments and posts online, and holds the website owner/manager harmless. Even after 230 was enacted, the forum owner was still concerned. I didn't interpret the laws the same way and felt we could patrol the electronic halls in a more leisurely manner, which led to my leaving the forum because I couldn't deal with the owner's paranoia on this subject.
I think that people who engage on investing-related social media spaces should understand that few people are posting who have more than their own personal interests in mind. The huge majority brags about gains since the data cannot be verified, and lie about their identities.
I am often asked to appear for guest spots or "Ask Me Anything" events in places like WSB. I once made the mistake of doing so -- not on WSB but a similar Reddit forum. I got jumped all over and had so many personal attacks lobbed at me that I bailed in mid-event. (Women with opinions in these male spaces that might as well post "No Gurlz Alowd" are not treated well.) I have turned down subsequent invitations.
2. Speaking of lies
There is evidence that one of the people who got everyone on Reddit/WSB whipped up about GameStop turns out to be a hedge fund trader. He pointed out that the excessive short selling for $GME was unusual and publicized the opportunity, but the big gains were available only to the first group of traders who got in -- including that hedge fund trader. Basically it was a Ponzi scheme or what I am calling a pump and dump scheme.
3. Online brokers are not charitable organizations. Robinhood is not your friend.
They have to make money somehow, and I am thankful that my many years of reviewing these companies has helped lead to greater transparency on that score. My biggest issue with Robinhood is that they pretend to be all about the little guy when it exists primarily to make money for its venture capital investors by proceeding to its IPO exit strategy.
Their CEO is not registered as a broker/dealer, which is incredibly rare. The firm is undercapitalized and is frequently fined by the SEC and FINRA for doing stupid stuff like misrepresenting the quality of their trading algorithm. In 2018, Robinhood launched a cash product that illegally used cheap SIPC insurance rather than the much more expensive FDIC insurance, and had to pull that launch back.
I've covered the firm's gaffes since December 2014, when its PR director demanded to see my Barron's column prior to its printing. I am quite familiar with Robinhood's approach. Robinhood has also created the fiction that it invented zero-commission trading when in fact that practice has been going on since the early 90s. I had conversations with Schwab officials in 2012 during which they told me that they planned to cut commissions to zero as soon as they could figure out how to do it; that happened in October 2018 -- Schwab is not a terribly agile company -- but Robinhood took credit for plans that I had heard of before their little green logo was designed.
4. What can be done with laws and regulations to prevent this in the future?
Should we make either social media posts illegal, or prevent brokers from stopping trades? I don't think so. I do believe that people interested in the markets and in trading information on social media should be made aware of pump-and-dump schemes and how to recognize them.
It would be pretty easy to design a 10-minute course with a 5-question quiz at the end to help drive that point home. Maybe I will be the one to write it someday.