It’s hard to argue that everything going on in financial markets lately is particularly smart. The question is, how silly should we let things get?
Meme stocks like GameStop are still swinging wildly as they go in and out of fashion on Reddit. AMC recently told people buying its stock that they’re probably going to lose all their money. People are piling into cryptocurrencies based on memes and learning some hard lessons in volatility, much of which is driven by Elon Musk’s tweets. The NFT bubble might have already popped because it turns out spending hundreds of thousands of dollars on a GIF might not be the soundest investment.
Amid the chaos, there’s been quite a bit of hand-wringing among regulators, lawmakers, and finger-waggers on CNBC over what to do about it. Many investors are trading like it’s a game, and one that they are likely to lose — some knowingly, some not.
“Is there ever going to be a way to stop people from buying things at stupid prices? No,” said Andrew Park, senior policy analyst at Americans for Financial Reform. “There’s a key difference between people doing stupid things with their money versus being in positions where they’re either being exploited or manipulated.”
There’s a fine line between keeping people from taking too big of risks and locking them out of opportunities, between letting people do what they want with their money and keeping them from being swindled. How much to protect investors is a thorny question to answer — especially when sometimes they need to be protected from themselves, or they don’t want the protections at all. When I talk to day traders, the sentiment is often that they want to be able to take more risks, not fewer.
Speculation is hardly new; the same goes for gambling. Betting on a newly minted meme stock like Wendy’s or cryptocurrency like dogecoin isn’t all that different from playing blackjack, which is allowed. And Wall Street bigwigs take risks all the time, risks that can have major consequences for everyone. (See: the global financial crisis, or, more recently, the implosion of the hedge fund Archegos Capital that cost it and major banks billions of dollars.) The question regulators are facing right now as more and more people get into trading is which levers to pull and how much. There are plenty of ideas out there regarding what to do, such as increasing disclosures, shortening trade settlement times, or even banning certain practices and vehicles altogether. But new policies can come with certain trade-offs.
For example, people using free trading apps like Robinhood are probably not getting the best execution on their buys and sells, but if you take away the mechanisms that facilitate that — which the Securities and Exchange Commission says it’s looking at — that might mean trading will no longer be commission-free. Reasonable minds can disagree about whether that’s the right move to make. It probably wouldn’t keep tons of people away from investing — day trading existed long before Robinhood — but it might keep some people out.
More broadly, there’s a difference between being encouraged to make bad decisions with your money and being allowed to. It’s hard not to think it would be a good idea for newbie investors to have some more friction before making risky bets. Most day traders lose money, and it’s often the case that the more they trade, the worse they do. Risky options trading can be particularly hard to win at in the long run. The problem is, the companies facilitating commission-free trading make more money the more people trade.
That there should be strong legal protections for investors and consumers so they’re not taken advantage of shouldn’t be controversial in American politics. After all, no…