Sprinkles in Support of Robinhood's Position
“Free-trade brokerages level the playing field.” (Though many commentators caveat they’re not perfect.)
“Retail investors should be recognized as important market participants. Like their institutional counterparts, retail investors provide market liquidity. The fact that retail investors behave differently from institutional ones, and sometimes behave differently from each other — far from being a bad thing —can be valuable in times of market stress. Having diverse strategies represented in the market can cabin wild market movements by decreasing herd behavior and allowing better matching of buyers and sellers.
…Still some investor protection advocates, pointing to the dismal state of financial literacy in this country, worry that those new to investing—or those enticed by more “fun” aspects of app-based trading—will make poor decisions. That’s not a reason to create obstacles to market access.
The emphasis instead should be on empowering retail investors to make their own, informed, decisions about how to invest their money.
Although financial literacy may improve naturally as more people invest, investor education need not passively rely on exposure. While the SEC has an important role to play in promoting financial literacy, it doesn’t stand alone. Some brokerages also have enhanced their investor education offerings in response to increasing retail interest. These efforts to help individuals—especially those new to investing—understand the risks of short-term trading and investing in complex products and the benefits of diversification will support, but not interfere, with their ability to invest.
None of this is to say all brokerages are without regulatory issues. Regulations govern many aspects of retail participation, like investing in options or on margin, and brokerages not meeting existing requirements may need reform. But when faced with increased retail investing, we should not create new regulatory requirements that push those investors back out of the markets.Jennifer Schulp, Business Insider
“The COVID-19 pandemic and economic stressors most definitely contributed to the move against Wall Street [the rise of GameStop and other meme stocks], but anger and frustration between low-to-normal wage workers and high earners had actually been building for a long time.
‘Adjusting for inflation, the bottom 50% of wage-earners have seen no difference (in wages) for 30 years… they don’t have $500 in the bank for emergencies,’ [Thomas Reilly, a Virginia Tech economics professor] said.
Consistent inequality between economic classes, coupled with the financial desperation that many feel permanently stuck in, led to a perfect January storm bred through volatility of the stock market.
Despite the conclusion, the tactic used by Reddit users and small traders was revolutionary. It’s always satisfying to see justice occur, especially against an entity that’s seen as invincible and all-powerful. Retail trading apps allowed for it to happen as rapidly and chaotically as it did, which attests to their positive side; maybe they will allow for more of an equal bridge between the stock market and everyday people after all.
… Personally, I find the stock market itself hard to support, solely due to the exploitation and advantageous nature of all things financial. Yet as the fiasco in January showed us, trading apps provide an unprecedented platform to the previously exploited, as they help address class inequality and increase financial literacy. Additionally, the experiences and lessons you can learn from accessible investments are valuable in maintaining good financial health — but be careful that it’s not something that will leave you in a bigger hole than you were trying to get out of. “Tarana Sadr; Collegiate Times
“Retail investors, like me, no longer have to lose our hard-earned coin paying $6.95 per trade. With a free trading app, we can grab a stock tip from Reddit or TikTok, click a few buttons and bam — we’re in the game. But, Robinhood is not without its problems. It shut out GameStop buyers on Thursday, inspiring talk of dark Wall Street conspiracies, but the move apparently was necessitated by a liquidity crunch caused by all of the volatility. After raising a billion-dollar investment and a $500 million line of credit overnight, Robinhood unfroze GameStop stock purchases on Friday and the rocketing resumed.
Yes, there is the possibility, some would even say the probability, that we retail investors will get hurt when the GameStop stock settles down. That’s a risk of investing. Plenty of institutional investors on the GameStop buy side, including BlackRock, are also taking a risk. The difference is that these are individual Americans exerting their will. If hedge funds have decreed that GameStop’s stock is a loser, are we all supposed to salute?…
… Now consider using [the retail investors’ purchasing] power for social good, as a way of signaling support for — or, alternatively, of boycotting — a company’s goods, services or business practices, but doing it with stock and options. For a boycott, investors could even double down and buy shares from a competitor.
If a corporation’s stock plummeted 20 to 30 percent in a single day, that would send a clear and resounding message to its board of directors, principal shareholders and senior leadership team, i.e., the decision-makers.
Publicly held companies answer to these entities, and what these entities care about is stock prices. Companies are often more beholden to shareholders than to their employees, even if some are attempting to shift that paradigm. And to C-level executives, the public ‘optics’ matter.
I hope my fellow retail investors will make GameStop just the start — and use our newfound power to help companies and corporate leaders find a conscience. Eventually, they’ll start listening and understanding that putting their communities and their employees first can improve business and still benefit shareholders.”
Sprinkles in Support of Berkshire's Position
“Free-trade brokerages encourage gambling and have questionable business models – and it’s something to be worried about.”
“A lack of live sports is one of the primary reasons for the significant increase in retail. Specifically, many of these new investors began investing during the pandemic to replace sports betting. Men aged 25-34 years old are the most likely demographic to bet on sports, and it is the same demographic that has flocked to Robinhood. The transition from betting to investing is very concerning as it suggests that there is now a large number of investors who treat investing like gambling. Since these people treat investment like gambling, they are less likely to invest based on fundamentals and research and are much more likely to invest in whatever stock they believe will make them money quickly. The average retail investor has underperformed the market by 11 percent, demonstrating how reckless the new retail investors’ strategy is.
The second factor behind the wave of new retail investors is the prevalence of investment-themed social media accounts and their content. Investment-based social media accounts are becoming more and more popular. As of August 2020, investing videos on TikTok had 2 billion global downloads. In general, the investing accounts on TikTok make it seem easy to make money quickly by investing. All of the posts are about significant gains, and there are almost no posts about losing money through investing. This type of biased posting gives their users the idea that the stock market is a place to make money quickly, which it is not.
… Teenagers and young adults are especially at risk to start investing due to social media, as most users of social media sites such as TikTok are under 30 years old. Additionally, teenagers and young adults are more prone to addiction. This is concerning when considering that gambling is very addicting and the similarities between gambling and investing among the new wave of retail investors. Dr. Timothy Fong, the co-director of the UCLA Gambling Studies Program, stated that activities such as playing the financial markets and sports betting show cognitive, motivational, and personality parallels between gamblers and stock traders.
Some addiction experts also believe that it will be harder to treat investment addiction as people view big losses as part of the educational process of investing. Therefore, teenagers and young adults are more likely to start investing because of investment-based social media accounts. Once these teenagers and young adults start investing in reckless ways, trying to make large amounts of money quickly, they are more likely than other groups to become addicted to that feeling of making a significant gain…
… The issue of young investors harming themselves through the stock market is one that I believe will grow exponentially in the near future. It is vital to act proactively now instead of reactively later.”Henry Mockridge; student of the Public Policy and Law Program at Trinity College. (published in The Connecticut Mirror)
“New investors getting into the market isn’t a concern on its own. But if those folks are gambling like crazy, then it’s something we want to know about.
Individuals opened more than 10 million new brokerage accounts last year. That was a new record. And it turns out, these folks aren’t buying indexes. They’re wildly speculating.
For example, more than half a trillion dollars’ worth of stock options traded on a single day in January. That’s the highest single day on record.
If you’re new to this idea, the point here is that you trade options for one reason… to make a directional bet with leverage. You see a one-way train, and you want in on it. And that’s exactly what has been happening.
The same is true for another highly speculative area of the markets… penny stocks. These are shares of very small and often-misunderstood companies. The allure is that they can go up a lot, in a short period of time. But because of their size, they’re also ripe for manipulation.
The potential gains are attractive to investors, though. We saw an incredible 1.9 trillion transactions in over-the-counter markets – where many penny stocks trade – in February. That’s an incredible 2,000% increase versus the previous year…
… An astounding 28% of all Americans bought GameStop or other viral stocks in January, according to a Yahoo Finance-Harris poll. The median investment, according to the poll, was just $150. The largest group of buyers was men aged 18 to 44. And 43% of these folks said they had just signed up to get a brokerage account in the last month.
That’s hard to fathom. But it’s the reality we’re living in right now. A new band of traders is here. And they’re here to speculate.
This is a clear sign the Melt Up is here. It won’t end well.”Dr. Steve Sjuggerud; Daily Wealth
“Where are the regulators? Like the offside rule in football, the laws on advising on investment can be fuzzy but there is a strong case that the regulators must get on top of sharks who break the law. To give investment advice to unsophisticated investors in major markets, you need to be registered with a regulator…
…The exchanges must also prevent speculative runaway prices by bringing in circuit breakers for the upside melt-ups, as well as the meltdowns. Hong Kong is notably one exchange that does not have a circuit breaker on small stocks that halt trading and allow brains to catch up with emotion.
A fool and his money are soon parted. This pump-and-dump scheme was perpetrated by malicious sharks on ill-informed conspiracy theorists, those with establishment-envy, and the rest of us who are plain greedy. But the madness of the mob is not new.
The GameStop attack was a tiny leak in a bubble driven by excess liquidity and won’t cause a systemic collapse of the markets. The next one might. And we haven’t even talked about bitcoin.”Richard Harris; CEO of Port Shelter Investment (published in SCMP)