The GameStop Rollercoaster: Are you looking for additional Regulation?

The GameStop roller coaster is evidence that the Internet has democratised trading. When a hedge fund-as the professional agent of the number of investors-sells short with the intention of cashing in on the decline of a particular company's stock price, several non-professional investors can legally get together through the Internet and buy in to profit on the upward movement of the stock, extracting funds in the short-sellers. We should remember that trading differs from investing. All purchases and sales of securities are trades, however the holding period determines whether one is trading or investing. Trading is a short-term strategy, like house-flipping in tangible estate for gain. Investing, on the other hand, is a long-term strategy, like buying a house to lease it for income. The motivation of both groups-in trading-is to gain from the others' loss.

To participate in the securities markets is to assume perils of a variety. This is the principle of caveat emptor, which is the admonition towards the buyer to conduct research and exercise caution before purchasing, whatever the holding period will be. The government securities laws aren't, like some state blue sky laws, in line with the merit of a company. Lawmakers and regulators have little if any expertise in valuing businesses, practices, and enterprises. The federal securities laws do not be certain that stocks listed on exchanges are good buys-the market decides.

The core principle in playing in the market is the fact that one cannot put into that market material misinformation: you cannot lie. This principle offers the structural integrity for that roller coaster and the numerous decisions that construct the features of that company's particular ride. The securities laws become relevant when information-public statements and manipulation schemes-that matters to decision-makers is false. Manipulation schemes are false statements because participants' market decisions are thought information about perceived value.

The risk for which a party may seek legal redress is fraud. As long as the company makes sufficient and truthful disclosures and market participants don't make materially false statements or manipulate the market, the government won't interfere with transactions for the reason that security, regardless of the merits associated with a transactional decision. Unless GameStop market participants made materially false statements or took “statement-like” actions-such as parking stock or using wash trades-the market will sort out the gains and losses. In the end, the ride car returns towards the loading station-where the ride began-the investors have returned towards the start, and certain unaffected. The traders, however, might have enjoyed big gains or losses at each other's expense because, ultimately, trading is really a zero-sum game .

Some claim that the SEC should “step in” and regulate GameStop-type trading. We ask why and just how? The so-called Limit Up Limit Down rule , implemented after the 2010 “flash-crash”, and also the alternative uptick rule for short-selling are already in place. A patronage gate to market participation limits market gains to “professionals” and wealthy players. This really is undemocratic and elitist. Limitations on messages posted in subreddit groups that urge members to pile right into a specific stock for example GameStop truncates First Amendment rights to freedom of expression that professionals exercise. Perhaps we should recognise the term “abuse” may be used to characterise lawful conduct that causes the “wrong” party to get rid of money.

Traders and investors are free to take financial risks that government departments and public observers might not make, and this “regulatory respect” for the role of independent economic decision-makers is the reason why the price-and-volume charts for publicly traded companies appear as roller coasters, upgrading and down over any given time span. The variations in these roller coasters are the amounts and percentages in price changes and the positive and negative slopes over different periods of time. The shape of those rides over time represents thousands of buy, sell, and hold decisions, which are the connection between participants' access to information about the organization and about its market, experiences, investor risk-tolerances, and decision-making algorithms.

Another analogy that describes some facets of the stock exchange is a casino, where gamblers risk their money in the hope their good fortune will result in a big return on the bet. Casinos are heavily regulated. Were an online casino to be discovered to have magnetized the roulette wheel to dictate winners and losers, engineered a slot machine game to never payout, or any number of other practices to further pad the casino's odds, then your casino is going to be prosecuted. Within the markets for company securities, the SEC will part of if the companies cheat by lying about their financial health or even the state of the business, or if brokerage firms or traders engage in market manipulation. The SEC's role isn't to ensure returns but to determine that the marketplace is fairly structured, operates effectively, which participants play in accordance with the rules of disclosure and truthfulness. Otherwise, the SEC stands back and lets investors take risks in accordance with their very own tolerances. Enforce the guidelines but let the players play-over time, this philosophy promotes fair markets.