Recent activity in the US stock markets has prompted much sound and fury, but the long-term impact is so far unclear.
There is no disputing that there has been a surge of new individual investors participating in the US stock markets in recent years. In particular, the pandemic, with its enforced time at home and government stimulus cheques, has increased the allure of equity trading for many Americans. Although they remain a small share of the market by value, they approached a quarter of trading activity by number of shares in recent months.
The events around the share price of GameStop are what has really thrust the idea of a retail investor surge into the spotlight. It is a safe bet that many people had all but forgotten about GameStop three months ago, as it went from being one of the world’s largest video game retailers to facing financial difficulty in recent years. Now the Texas-based video games retailer has become synonymous with soaring share prices and a social media-stoked rally with the explicit aim of squeezing short sellers — notably hedge funds known to be short on its stock at the time.
Add to this the move by brokers to temporarily restrict trading in GameStop shares at the height of its January rally, which prompted wild conspiracy theories that they were in cahoots with Wall Street and trying to protect the interests of institutional investors, and you have a controversial issue on your hands.
January’s events have thrown up a whole host of questions about the functioning of US equity markets: what role does short selling play, could talking up stock on social media count as market manipulation, does the equities settlement cycle need reform, is there enough transparency around the rebates certain retail brokers get from market makers? The list goes on.
With the Securities and Exchange Commission, the Financial Industry Regulatory Authority and committees from both Houses of Congress examining these issues, they certainly aren’t going to die down quickly.
