By: Ashlee Kuan
On January 29, 2021, acting Chair of the U.S. Securities and Exchange Commission (“SEC”), Allison Herren Lee, along with Commissioners Hester M. Peirce, Elad L. Roisman, and Caroline A. Crenshaw, issued a statement stating that the Commission would begin an investigation into “the extreme price volatility of certain stocks’ trading prices . . . ” with the top priority being “[t]o protect retail investors . . .” from federally prohibited activity.[1]
The events triggering this SEC investigation started in a chatroom on Reddit, where digital traders came together with the goal of investing in particular stocks being shorted by major hedge funds, meaning that they were betting the price of the shares would go down.[2] The traders were successful and the price of shares in companies like GameStop Corp. (“GameStop”) and AMC Entertainment Holdings, Inc. (“AMC”) skyrocketed, resulting in brokerage platforms like Robinhood placing temporary restrictions on its users trading those securities in order to fulfill the collateral obligations with their clearing house.[3] Despite the restriction being temporary, users were outraged, some launching lawsuits in state court.[4] Lawmakers and members of the financial industry community urged the SEC to inquire into the events to determine whether there had been violations of the federal securities laws.[5] Financial industry participants have been quick to criticize SEC regulations voicing concerns over its outdatedness.[6] Although the SEC acting Chairwoman stated that the SEC does not currently have concerns that the recent phenomenon will have broad impacts on the financial industry, the SEC should review its current regulations to account for modern-day technology and a rapidly changing environment.[7]
Lawmakers and former regulators alike have raised concerns about the use of trading applications like Robinhood in creating a perception that the stock market functions like a video game or a casino.[8] A trading application like Robinhood makes it easier and more convenient for retail investors to execute trades; however, such ease and convenience is also facilitating constant trading activity where users seem less and less dependent upon a company’s fundamentals to determine whether purchasing shares in that company is a sound investment.[9] The SEC is particularly concerned with this kind of investment behavior because participating in the stock market results in very real gains and losses for investors who need to be aware of the risks involved.[10] In the future, our society could see an increase in low-cost trading platforms, and the SEC ought to evaluate how current regulations include that technology or how the regulations can be changed to account for that technology.[11]
As the SEC continues its investigation, it also ought to consider how to restore confidence in the market when the first question on people’s minds seems to be, “Will this happen again?” The stock market is supposed to reflect accurate value, and the ability to undermine that value, to the extent the market has seen with GameStop and AMC, seems to point to social media as an essential aid. Because of the impact social media has demonstrated on the volatility of certain share prices, it will become even more important for the SEC to consider how these kinds of developments in technology can or will be used as a tool to manipulate the market.[12] Given that social media is not going away anytime soon, it seems reasonable to conclude that it will continue to impact investors’ choices and confidence. Monitoring social media for fraud and manipulation could become another responsibility for the SEC in protecting investors and maintaining fair markets.
In addition to potential enforcement actions, the SEC has acknowledged that its investigation will also be used to find areas of improvement in current regulations.[13] Even if the SEC decides to implement changes, such changes will not be formalized for some time.[14] However, the SEC’s investigation is by no means a waste. Rather, it is an opportunity for the SEC to review and update current regulations to conform to an ever-changing and technologically dependent society.
[1] Statement of Acting Chair Lee and Commissioners Peirce, Roisman, and Crenshaw Regarding Recent Market Volatility, SEC Public Statement (Jan. 29, 2021), https://www.sec.gov/news/public-statement/joint-statement-market-volatility-2021-01-29.
[2] Nathanial Popper et al., Robinhood, Under the Gun, Raises $2.4 Billion, N.Y. Times (Feb. 1, 2021), https://www.nytimes.com/2021/02/01/business/robinhood-gamestop-trading.html.
[3] Id.
[4] Annie Massa et al., Robinhood’s Meteoric Rise Feels the Pull of Wall Street Physics, Bloomberg (Jan. 30, 2021), https://www.bloomberg.com/news/articles/2021-01-30/robinhood-s-meteoric-rise-feels-the-pull-of-wall-street-physics.
[5] Jesse Westbrook, SEC Says It’s Investigating Stock Mania for Potential Misconduct, Bloomberg Law (Jan. 29, 2021), https://www.bloomberg.com/news/articles/2021-01-29/sec-says-it-s-examining-market-mania-for-potential-misconduct.
[6] Id.; see also Ben Bain et al., Wall Street Mania Poised to Spur SEC Focus on Apps, Shorts, T+2, Bloomberg Law (Feb. 3, 2021), https://www.bloomberg.com/news/articles/2021-02-02/wall-street-mania-poised-to-spur-sec-focus-on-apps-shorts-t-2.
[7] See Ben Bain, Acting SEC Chief Says Market Strong, Fraud Probes a Top Priority, Bloomberg Law (Feb. 01, 2021), https://news.bloomberglaw.com/securities-law/acting-sec-chief-says-market-strong-fraud-probes-a-top-priority (quoting the acting Chairwoman from an NPR interview); see also Massa, supra note 4 (highlighting that Robinhood’s app is currently a primary source of controversy).
[8] See Bain, supra note 6; see also Westbrook, supra note 5 (referring to a quote by Elizabeth Warren stating her concerns over “casino-like swings . . . diminishing confidence in the stock market”).
[9] See Bain, supra note 6.
[10] See Bain, supra note 7 (quoting the acting Chairwoman from an NPR interview).
[11] Kenneth Breen et al., GameStop Trading Poses ‘Manipulation’ Challenge for Regulators, Bloomberg Law (Jan. 29, 2021), https://news.bloomberglaw.com/class-action/gamestop-stock-trading-poses-manipulation-challenge-for-regulators.
[12] See Bain, supra note 6.
[13] Id.
[14] Westbrook, supra note 5.
