Don’t Worry Retail Investors, The SEC Will (Maybe) Protect You

If you’re a retail investor or otherwise count yourself among the multitudes of market participants perpetually at a disadvantage not just vis-à-vis billionaire hedge fund managers and institutional whales, but also in relation to legions of Terminator robots that can pull the trigger faster than you can refresh your favorite Reddit forum, don’t worry.

Because the SEC will protect you.

This week’s epic farce in “markets” (and the scare quotes are there for a reason) came full circle Friday, when the regulator issued a statement “regarding recent market volatility.”

Doubtlessly prodded by lawmakers on Capitol Hill (which had to be reclaimed from Trump’s army earlier this month), the SEC said that while it’s “evaluating the extreme price volatility of certain stocks’ trading prices over the past several days,” citizens shouldn’t panic. Because “our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes.”

If you’re not laughing now, then you need to check your pulse. Remember, we’re talking about GameStop, AMC, Bed Bath & Beyond, BlackBerry, and Build-A-Bear, just to name a few.

I’m not sure what it says about America’s capital markets when the SEC has to reassure an already frazzled nation (which just three weeks ago looked on in astonishment as thousands of people, including a man wearing a dead beaver and plastic horns on his head, briefly seized the Capitol) that the financial system is capable of withstanding double-, triple-, and quadruple-digit rallies in the shares of stores that sell used Xbox games, bath towels, and customized teddy bears.

In its Friday statement, the SEC promised to “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

So, that’s just the SEC promising Reddit that the US government is going to ensure that no broker or trading platform will be allowed to illegally inhibit the capacity of individuals to buy shares of companies that operate businesses which virtually nobody cares about anymore.

When was the last time you texted someone on your BlackBerry and said “Meet me at Build-A-Bear”?

Still, it’s impossible to deny that the game has changed.

“WallStreetBets has shown that the right-tail risk is infinitely higher than many professionals previously believed,” professional trader Kevin Muir said Friday.

“In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws,” the SEC added. “Market participants should be careful to avoid such activity.”

At the risk of extrapolating from what I imagine was deliberately vague language, that seems like a euphemistic way of the SEC saying something like this: You might be engaged in collusive activity even if you don’t realize it.

Read more:

‘Anger’: WallStreetBets, GameStop, Robinhood Drama Becomes National Scandal

‘Insane, Dangerous’ Reddit Stock Phenomenon Raises Uncomfortable Questions

“I have no prejudice that the WallStreetBets crew is somehow inferior to other investing classes,” Muir went on to say, in his Friday missive to subscribers. But he echoed my cautionary remarks from earlier this week regarding the inherent perils of touting what regulators might (fairly or not) deem to be collusive behavior in a public forum. “There are sharks in the hedge fund community [but] the difference is that the hedge funds are more subtle in their touting,” Muir remarked. He implored folks to consider that while that “seems crazy,” all you have to do is “look at Reddit” to see how blatant it is.

In some respects, the Reddit crowd is unwittingly attempting to play the “Whataboutism” card. “Well what about Libor?” Or, “Well what about all those chat transcripts showing how nefarious and collusive Wall Street can be?”

As a friendly reminder to WallStreetBets (and I mean “friendly” sincerely): “Whataboutism” is fatally flawed. The logic doesn’t work. If I break into your house and steal your television, would you accept the following as an excuse: “Well what about all the times other people have stolen televisions?” Of course you wouldn’t. The fact that televisions get stolen all the time doesn’t make it legal for me to steal yours.

To be clear: I’m not suggesting that anyone is in legal jeopardy. I’m not a lawyer. I took the LSAT. But I went to business school instead.

In any event, it’s hard to imagine things getting any more absurd. But I can’t count the number of times I’ve said that over the past four years. And America has proven me wrong at every turn.


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18 thoughts on “Don’t Worry Retail Investors, The SEC Will (Maybe) Protect You

  1. This micro bubble in a handful of stocks, which is inside of the larger, total market bubble, will be allowed to eventually pop (imho) because not only is it true that not enough people care about towels, bears and used video games- but as long as the “big” money does not get hurt too much- no bailout.
    The Working Group on Financial Markets can just say “sorry folks, but that’s capitalism!!” and conveniently leave out the word “crony”.
    Hoping that as a bystander, I only get a few scrapes from all of this, but unless I am willing to actively invest (work 15 hour days- I know from experience) and as disgusting as this all is – US equities are still my best option for passive investing.

  2. More fun ahead as the internet and the ‘digitization of everything’ tears the social/political/economic fabric to threads. Is there any system of governance out there that shows it’s up to the task. The starship earth needs a Captain Kirk to figure this one out.

  3. One area that hasn’t been mentioned are the shareholders that lent their shares to the short sellers and are now getting them back at a much higher value as the shorts exit the market.

  4. It’s good. We have mollycoddled professional short-sellers for way too long. AOC is right – we’ve allowed the capital markets to become casinos for professional speculators rather than venues to allocate investment capital to entrepreneurs and existing businesses.

    1. Short sellers would argue they’re essential cogs to that capital allocation. After all, betting against GameStop seemed like a pretty good investment idea… And shorting, say, cruise ships and airlines stocks early in the COVID crisis would have been a brilliant move, fully justified by fundamentals.

      1. I disagree with that premise, but what do I know? It reminds me of the argument that high frequency traders add “valuable liquidity” to the markets. True until it is actually needed.

        But when short interest exceeds the available float it has gone well beyond being a cog in the system.

        Remember Synthetic CDOs (CDO-squared) in 2007 & 2008? About the same, isn’t it?

      2. “Betting against gamestop seemed like a pretty good investment idea”. I disagree. Gamestop over the past years had already lost 95% of its value. To quote Cramer, “bulls make money, bears make money, pigs getting slaughtered”. The me-too-short-trade pig slaughter will be soon followed by the me-too-reddit-pile-on pig slaughter. This is really just a cautionary tale about pigs learning lessons.

        I’m reminded about a story I read a few years ago about a novice trader who lost a small fortune after placing a massive short on an irrelevant biotech penny stock. And there were quite a few follow up articles about not taking dumb risks. The trader didn’t stand to make much shorting a penny stock, no one should risk unlimited amounts of money for limited returns, etc, etc.

        Honestly, I find thid whole episode amusing. And “mollycoddling” is a hilarious new word I learned, so yeah, thanks Derek

  5. Unfortunately, I view this as signaling from the SEC that they are going to target collusive investors who are publicly posting their discourse. These are easy targets the same way that folks who were downloading movies and music from torrents were easy targets. It’s a scare tactic designed to dissuade common people (retail crowd) from doing what professionals have been for years. Because they don’t possess the funds necessary to defend themselves in court as those professionals do.

    What it really ignores is how the SEC fails in its oversight objectives. Sure, you can go on reddit and see evidence of collusive behavior by reading publicly available messages. OR you could actually analyze trading patterns by specific firms over a longer period of time to determine if hedge funds are making the same types of trades at the same time collaboratively driving asset prices in a preferred direction. This requires more work and would definitely target the professional crowd, but it seems within the scope of the SEC to perform this type of historical investigational work.

    With data analytic tools like Splunk this really wouldn’t be that difficult to do but, I imagine there are other reasons why the SEC might want to shelter the hedge fund and macro trade crowd…

    1. Yeah, how I read it is that because it’s a distributed network of traders and they have to communicate using channels that are freely readable to the public, they are at a disadvantage compared to fund managers colluding during a lunch in Midtown.

      The whole thing seems kind of rigged, kind of like a casino, and kind of like we have to hope it keeps going so we don’t end up eating cat food in retirement.

    2. FWIW, my own take is that SEC enforcement is wholly inadequate but, otoh, they’re not dumb. They would chase unusual short dated Call buying in just-announced targets of mergers for example.

      So, apart from the general financialization of our economy and the general “buyer beware” attitude/switching of duty of care to the retail purchaser from the professional salesman, I still haven’t seen general Hedge Fund industry-wide malfeasance. LIBOR fix might have been one of the clearest case of such malfeasance but it was banks, not hedge funds.

      1. Rest assured there is rampant sharing of trade ideas among the HFs. Some deliberate, some less intentional because smaller funds rely on ideas pitched to them by their prime brokers.

  6. whataboutism and tvs…. but if you catch someone stealing your TV, you might knock them around a bit before the authorities get there. Some might consider this the knocking around.

  7. But who will protect the HFs, long-onlies, and big investors who are long GME and loving this? Or the market makers and dealers who are feasting on the volume and premia? Think of poor little Citadel Securities!

  8. WSB participants and ringleaders still have many tricks up their sleeve before any of them is prosecuted for securities crimes, including: legal defense funds, paid for by crowdsourcing or Chamath or Elon; counter-investigations by Congress; a new voting bloc in the midterms; and collective action in markets other than the stock market. And if SEC decides to make an example of someone, get ready for the less savory allies of the common man to step in–here I’m thinking Anonymous (the cyber activists, not QAnon). In other words, prepare yourselves for SECleaks.

  9. From a national mental health perspective, I welcome this mania on GameStop. It allows the mind to subtly process the events of January 6th. Allthewhile feeding the outrage emotions that have gotten into the habit of being inflamed. Maybe more will start to realize that they’ve gotten themselves unhappy with all the happenings and need to just focus on life.

  10. The SEC is on the case. Rest assured, market integrity will be protected. The actual pronouncement/decision will be released in 5-years time.

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