Most investors aren’t playing in GameStop stock, or any other Internet chatroom-driven trading activity. But investors should be wary of regulators who may be quick to pounce on the stock price pop and subsequent fizzle.
The House Financial Services Committee will hold a hearing on Thursday in the week ahead. As the hearing title suggests, it promises to examine “who wins and loses when short sellers, social media and retail investors collide?”
The GameStop stock phenomenon has not been limited to the struggling video game retailer. And some retail investors have made out very well, even if they don’t directly own stocks in GameStop or other companies caught up in the sensation. Fidelity mutual funds owned over 9 million shares of GameStop at the end of September when it was trading for less than $6 a share. By late January, with GME shares trading for well over $100, Fidelity had cut its GameStop interest to just a few dozen shares according to the Wall Street Journal.
Thursday’s hearing likely will focus on process with hedge fund traders, market makers, the head of online chat service Reddit — where the chatter began — and the leader of trading app Robinhood expected to testify.
The commonly understood story is that small traders used an online chat to marshal support for GameStop, whose stock was heavily shorted by professional traders who expected the price to drop. Instead, chatroom traders bid the price up, many using the Robinhood trading platform, leading to a surge of trading volume. Robinhood then restricted trading for a short time in GameStop and other shares involved in similar frenzies.
Rooting out illegal actions in the investment markets is important. The Wall Street Journal reported on Thursday the Justice Department has launched an investigation into the trading activity. Manipulation of any kind should be met with swift and severe consequences to assure investors. But attempts to regulate risk-taking should be met with cautious deliberation.
