GameStop Trading Frenzy Spotlights Questionable Equity Market Practices

Seismic Triggering Event May Lead to Finance Industry Regulation and Prosecution               

2/4/21 – – You can bet that the fascinating, still-unfolding GameStop/Robinhood/Reddit/hedge fund saga has gotten Hollywood’s attention. It’s David vs. Goliath, old-school Wall Streeters vs. digital day traders, dinner parties vs. online message boards. Like the best of stories, there are plenty of twists and turns, winners and losers, good guys and villains. Billions of dollars are in play.

The trading frenzy has also gotten Washington’s attention. And while we don’t know exactly what happened to set off last week’s epic “short squeeze,” lots of people and companies have some explaining to do.

Senator Elizabeth Warren told CNBC, “We need an SEC that has clear rules about market manipulation and that has the backbone to go in and enforce those rules.” And a US Treasury spokesperson confirmed that, “Secretary Yellen has called a meeting with the SEC, FRB, FRBNY and CFTC . . . for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets.”

From the perspective of a crisis counselor, I call this type of situation a “seismic triggering event.” Crises are triggered when previously little-known negative circumstances explode into public view, setting off demands for reform. It’s equivalent to turning over a rock, finding all sorts of unpleasant, hard-to-defend things you didn’t know were there. (Defending the legitimacy of short selling to anyone who doesn’t own a Bentley SUV is a difficult task.)

When the ugly revelations reach beyond a single company and involve an entire industry, I call them seismic triggering events. That’s what we’re dealing with now. The practices of hedge funds, online brokerage platforms, trading-focused message boards and investment banks are all in regulators’ and perhaps prosecutors’ crosshairs.     

As discussed in Chapter 4 of The Crisis Preparedness Quotient (“How Crises Typically Play Out – 10 Predictable Tendencies”), triggering events sometimes appear in the form of film or literature. The tragic death of an orca trainer at SeaWorld and the 2013 documentary Blackfish accelerated a worldwide assault on the practices of the controversial marine theme park. The publication in 1965 of Ralph Nader’s Unsafe at Any Speed triggered public outrage that forced U.S. automakers to meaningfully address the unacceptable quality and safety of cars and  trucks.

And of course, the mother of all literary triggering events was the release in 1906 of “muckraker” Upton Sinclair’s novel The Jungle, exposing the harsh realities of immigrant life in the big cities and the  disgusting conditions in America’s meat packing industry. The book is credited with assuring the passage of the Pure Food and Drug Act of 1906, our nation’s first serious federal legislation regulating food and drug companies. 

Is a similar fate in store for the US securities industry? Will the Biden administration take this on as one of its first priorities? That remains to be seen, but Robinhood is taking the threat very seriously. On Friday the now-famous stock-trading platform posted a job listing for a “federal affairs manager” on Daybook. And the company will be promoting its mission to “democratize finance” in a TV ad this Sunday during the Super Bowl.

I guess we’ll have to wait for Netflix to definitively sort this all out. In the meantime, there will be strong demand for federal affairs managers in the finance industry. 

https://nymag.com/intelligencer/2021/01/robinhood-ban-gamestop-share-price-explained.html

https://www.boston.com/news/politics/2021/01/28/elizabeth-warren-gamestop

https://www.foxbusiness.com/markets/robinhood-hiring-federal-affairs-manager-as-congressional-hearings-on-gamestop-scandal-loom

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