A month ago, the House Financial Services Committee grilled the CEOs of Citadel, Robinhood, Melvin Capital, and the Reddit co-founder about the huge market fluctuations of GameStop, AMC, and other ‘meme stocks’. On March 9, the Senate Banking Committee held its own hearing to discuss the state of retail investing. Some lawmakers expressed concerns about potential “gamification” of online investing from online zero-commission brokers like Robinhood and the harm that could befall consumers who participate. Is the risk of allowing retail investors with presumably less experience participate in the stock market something Congress needs to address? Senator Pat Toomey (R-PA) repudiated these claims in saying, “the idea that you make the experience of investment enjoyable and easy is somehow a problem for some folks. Not for me.”
However, this has not stopped a small but vocal group of lawmakers from proposing problematic recommendations in response. Senator Elizabeth Warren (D-MA) has written to the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) to address so-called market manipulation. In response, the SEC said it was looking at gaps in market manipulation rules and will “seriously consider” increasing regulatory requirements for brokers. FINRA made a similar commitment to look at “gamification” of online investing. While these events might be an avenue for Sen. Warren to call for increased regulation on Wall Street, it is retail investors who could face more difficulty investing if these changes are made.
More Americans than ever are invested in stocks with over 50 percent having a stake in the stock market. For perspective, in the early 1990s, only about 20 percent of Americans were invested in the stock market. Brokers like Robinhood provide a no-cost platform for consumers to invest and have lowered barriers to entry for retail investors. Proposals like a radical change to the payment-for-order-flow model or age restrictions would threaten to undo this progress. The criticism of the payment-for-order-flow model generally centers around the idea that an investor can lose money on a stock, but the broker makes a profit by facilitating the trade. Robinhood and others utilize this model to provide fee-free investment opportunities to retail investors, and instead market makers pay the broker to process the trade. Drastic changes to this model could lead to retail investors being forced to pay broker fees and other associated costs to participate in the stock market. This could lock out consumers, especially first time and low-income investors from being able to access affordable investments in mutual funds, Cryptocurrencies, and individual stocks.
Senator Catherine Cortez Masto (D-NV) also broached the idea of increasing the minimum age requirement to 21 years old for investing, which could also cause problems for consumers looking to invest. Ironically, Sen. Cortez Masto made comparisons to restrictions on gambling in a casino - an industry quite unique to her state. However, the hyperbolic rhetoric conflating investing online with casino-esque gambling misses the mark. Legal-aged consumers should be free to choose to make investments that reflect their assessment. The idea that 18 year olds, who can volunteer for military service, buy a house, or purchase any range of products, should be barred from investing is a massive federal overstep. Similarly, if the rationale is young people have little experience investing and could make potentially risky investments, then delaying when they gain investment experience by upping the age requirement is unlikely to address that concern.
Concerns were also raised about whether GameStop and other stocks that saw drastic increases in stock prices were divorced from their underlying value of the company. While the ‘meme stocks’ were likely overvalued in this case, there is plenty of gray area when it comes to valuation. Senator Toomey again makes this point with Tesla, a company whose stock valuation has been questioned. Is Congress or any other government institution in a position to affirmatively say what the value of stocks should be? Investors choose to invest in companies for a variety of reasons based on their value system. For example, some investors may choose to invest in companies that align with their personal values. In the hearing in the House, Keith Gill (AKA ‘Roaring Kitty’) made a similar point, saying he invested in GameStop partially because he believed GameStop’s legacy business was underestimated based on his personal experience visiting GameStop stores growing up and his continued interest in shopping there. These subjective measures of value are difficult to aggregate and are what lead some to invest in or short stocks.
Some lawmakers have eyed the ‘meme stock’ episode as a way to increase regulations and taxes on Wall Street, but it would be the Main Street investor who faces increased barriers if these heavy-handed recommendations are adopted. Consumers should be free to choose where to invest, and zero-commission trading has democratized trading for more Americans to enter the stock market. While the focus of these conversations are generally on individual stock trading or short selling, it is important to remember that 401ks and other low-risk options are available for consumers. Using GameStop as justification for increased government intervention will disadvantage retail investors.