GameStop, Robinhood and the SEC

A panel of scholars discusses the recent extreme fluctuations in the price of GameStop stock and their implications for the future of securities trading

Image Credit: Pgiam/Getty Images

On today’s episode, Brian Knight, a senior research fellow at the Mercatus Center, has a roundtable discussion with a panel of experts on the GameStop saga that has unfolded in the stock market over the past couple of weeks. Brian is joined by Christopher Russo, Martin Gurri and Andrew Vollmer to discuss the market’s response to this anomaly, security regulator and policymaker reactions, whether they think something like this will ever happen again and much more.

BRIAN KNIGHT: My name’s Brian Knight, I’m a Senior Research Fellow at the Mercatus Center at George Mason University and today we’re going to talk about “The GameStop Affair.” The Wall Street drama that’s transfixed America, has made and lost millions of dollars, has led to allegations of market manipulation and has raised the question, just what are diamond hands anyway? This drama has also drawn the attention of securities regulators and policy makers as they worry about what this might mean and what, if any, response is appropriate. Today I’ve assembled a fantastic panel who can speak to this. I’m joined by Christopher Russo, who’s a research fellow at the Mercatus Center’s Monetary Policy Program. Prior to joining Mercatus, he advised top policymakers at the Federal Reserve on monetary policy and sovereign debt management. Martin Gurri was a former CIA analyst and the author of The Revolt of the Public and the Crisis of Authority in the New Millennium. He’s a visiting fellow at the Mercatus Center, and his essays can be found on a regular basis at Discourse Magazine. Last, but certainly not least, is Andrew Vollmer, who is the senior affiliated fellow at the Mercatus Center. He’s a former professor of law, general faculty, at the University of Virginia School of Law, former deputy general counsel at the Securities and Exchange Commission and a former partner in the securities enforcement practice at Wilmer Cutler Pickering Hale and Dorr. So, what happened? We saw the stock of several legacy companies—GameStop, AMC, BlackBerry—suddenly skyrocket in price. We heard allegations of malfeasance and skullduggery. Then there was a lot of talk about what role regulation should be playing or what changes should occur. Yet, I—and a lot of people—am scratching my head as to what prompted this? I know the PS5 came out, but it can’t be that big a deal, can it? Chris, what happened?

Bulls and Bears

CHRISTOPHER RUSSO: First, Brian, thanks so much for having me. I’m really looking forward to this. It’s going to be a lot of fun. Exactly what happened here? Let me focus on GameStop in particular, focus on one company. The three facts that we should grapple with: One, as you mentioned, there was a massive run-up in the share price of GameStop. It went from something like under $20 to an intraday trading of almost $500 a share, experienced incredible volatility, as well as became, overnight, one of the most-traded U.S. stocks. The story here is really one that we’ve experienced many times before. It’s one about bulls versus bears—people who are enthusiastic about GameStop stock and people who are really pessimistic. On the pessimistic side, we had hedge funds—hedge funds who shorted, which is to say they bet against GameStop in extraordinary amounts. There’s a certain amount of GameStop shares outstanding, and these hedge funds shorted more than 140% of those shares outstanding. What exactly is a short? Just to summarize, it’s one way you can bet against a company. The hedge fund borrows a share from someone who owns it, like you or me. They sell it at the current market price that they think is too high, and then they hope to buy it back later at the lower price—or at least, the price they think is more reasonable—and will make a profit on that difference before returning it to the lender. Then on the other side, you have the bulls—people, as you described, using sometimes colorful language like diamond hands, to describe how optimistic they are about GameStop. They went in, they bought a lot of the stock, and you have this tension between people who thought the stock was going to go to zero and people who were quite optimistic. In short, that sent the price of GameStop skyrocketing to the point that, when these shorts in hedge funds or otherwise—had to try and buy back some of the shares in order to make good on their loans, they had to do so at rapidly increasing prices. At least for some who might have bought GameStop early on in this process, they have made a tremendous amount of money.

War Bands and Subreddits

KNIGHT: One of the things that seems to strike me as different about this is the venues on which this activity occurred. Specifically, you have venues of communication, like a Reddit forum or WallStreetBets, and then the venues of trading. Robinhood, which is an online broker, is used as the paradigmatic example, where you have folks who are retail investors—they’re not necessarily professional; they’re not necessarily doing a lot of other investing—suddenly being able to access pretty sophisticated techniques and tools from their phone. It strikes me that that has changed the dynamic here. If anyone hasn’t read Martin’s book, you really should. It’s Martin’s world, and we’re just living in it. It seems that when I read about this, and I had read your book previously, I said, “This all sounds very familiar.” What’s your sense as to the role that the online community is playing in this? And what does that mean?

MARTIN GURRI: I could think that idea of it being my world—in many ways, I’m not taking it as a compliment, I think. Look, I guess the simplest way to explain what happened is, you have a gang of young males—they seem to be mostly males, almost entirely males as far as I can tell—doing what gangs of young males always do, which is engage in risky and destructive behavior. These young guys were deep into gamer culture, so like transformed the financial markets into a massive online game in which the player tries to kill those evil hedge fund zombies. This cohort was socialized in a specific information environment, and that’s where things get interesting, I think. When I first went into WallStreetBets, I told myself, I thought, “I know these people. I’ve seen them before.” They had the look and feel of every one of the web-inspired revolts from below that I have been basically researching for 10 years. It’s 4chan with a Bloomberg terminal, is what they call themselves. If you want to think about this in noneconomic terms, which, alas, is the only way I can think of it, there have to be a number of conditions in place for this to have happened. First, you have the emergence of this bizarre online community in a subreddit, a sort of fracturing and inventing of identity that happens all the time on the web. WallStreetBets is by no means an investment website. It’s a tribe. It’s a war band with its own identity markers and code of conduct. Secondly, the outlook of this community is entirely sectarian—that is, it considers itself to be the last bastion of virtue and resistance in a sinful and deceitful world. WallStreetBets deals in repudiation at least as much as it deals in stocks. When I read what they say, they seem to occupy the same moral and political space as most other web-inspired revolts, and I’m including in that Black Lives Matter and QAnon, for example. All exist to be against. They’re against that system. Their favorite investment app, Robinhood—whoever came up with that name knew their audience. Go to the subreddit. It’s full of emotional stories about the 2008 crisis, how their parents lost their homes, their jobs. Now, this is Reddit. Everybody is under some assumed name. There’s no way to verify these stories, but they set the tone. The financial markets favor the rich and crush ordinary people. The institutional players are corrupt failures. The right stand for a new generation is to revolt against the system. That’s what they thought they were doing. Lastly, I would say, once GameStop stock skyrocketed, the WallStreetBets war band found itself in a position I’ve observed many times. Suddenly, it looked like they had won. You saw that when the QAnon protestors took over the Capitol—they won. You saw that when BLM took over the autonomous zones in Portland and Seattle. Suddenly they had won, so what’s next? Well, they have no clue. They really have no clue. They have no leaders, no formal organization, no plans or demands, no coherent ideology. Like all sectarian groups, they’re actually against all those things—they smack of hierarchy and injustice. So, all they can do is keep doing what they’ve done. This will probably be one of many further eruptions, and to me, they’re entirely unpredictable, where they’re going to come next. This particular one caught me completely by surprise; I’ll be the first to admit it. The next one will probably do the same.

The New Broker-Dealers

KNIGHT: Thanks, Martin. I want to turn back to that in a second, but first, to round out the preliminaries here. We’ve mentioned Reddit. We’ve gone into detail about what Reddit is bringing to the table, or what Facebook or other similar venues are bringing to the table. Now, let’s talk about the Robinhoods and Webulls of the world, these new broker-dealers. Martin, I’ll confess, when you mentioned that the name seemed to be somewhat apropos, that clicked for the first time for me. I’m not very smart. It is interesting that it is setting it up as something of an inherently antagonistic relationship between the robbing from the rich and giving to the poor. But these brokers have also come in for criticism and for some calls for enhanced supervision and scrutinization. Andy, can you talk to us a little bit about what are the Robinhoods and Webulls of the world? What role are they playing in this? What is their part in the chain?

ANDREW VOLLMER: Robinhood is a broker-dealer, and it acts as an intermediary between people who want to buy and sell securities, and the places where they can get those securities, or a group of people who will buy securities from them. That’s what broker-dealers are. Broker-dealers are heavily regulated by the Securities and Exchange Commission. What you will see in most of the comments, at least the comments I have seen about Robinhood, is that they are part of the problem for two different reasons. First, they’re part of the problem because they offered free trading to their customers. Anybody who wanted to open an account at a broker-dealer called Robinhood could do it really easily on a glitzy internet site that apparently made it really easy to trade, so it appealed to this young group that Martin has described. And then, Robinhood compounded the attractiveness of its internet site by offering free trading. That means you don’t have to pay any commissions to Robinhood to buy or sell securities. That was a tremendous or dramatic break from precedent. Commissions payable to broker-dealers had been dropping for years; Robinhood broke through and offered free trading. There’s been a fair amount of criticism of Robinhood for these two features, that is, commission-free trading and a very attractive, easy-to-use internet site. I find these criticisms extraordinary because, like many other new technical developments, Robinhood cut costs to consumers and made the life of consumers much easier. Those are just the kind of innovations that are the lifeblood of our economy. It’s what sets apart the U.S. economy from so many others. So the innovations from Robinhood, in my view, have benefits that far outweigh any disadvantages.

Why Did Robinhood Restrict Trades?

KNIGHT: Andy, you mentioned some of the critiques of Robinhood that seem to me have come from the more establishment side of the house. The “Hey, these systems are allowing for destabilization. They’re allowing for excess volatility. They’re allowing people to get in over their heads,” or whatever. But Robinhood has also been criticized from the very people who were using it. When Robinhood and some of the other brokers halted trading on GameStop and some other stocks, there were allegations of malfeasance. There are allegations that Robinhood was trying to prevent the run-up in stocks, trying to protect the hedge funds who were short. Yet it seems like there is at least a plausible explanation for what happened. Can you get into that a little bit?

VOLLMER: Sure. That’s the second area of comment or criticism about Robinhood, that it did restrict trading in GameStop as well as a few other securities. They came in for a lot of criticism from their customers and others who support the individual. The claim was that Robinhood was trying to protect institutional investors like the hedge funds who were short sellers. The claim was that Robinhood was blocking the big group, the WallStreetBet’s group from buying more. Robinhood was doing this to protect the large hedge funds who were short. And there was another claim that Robinhood was protecting its major market-maker broker, who’s called Citadel Securities. This is all rampant and untethered speculation, and the evidence is against those theories. The explanation that seems to be both well-grounded and held by the people who are in positions to know is that Robinhood needed to restrict trading in certain securities because of contractual obligations, regulatory obligations that Robinhood, as a broker-dealer, has to another regulated entity higher up in the securities world called a clearing broker. There can be intermediate levels, but the main clearing broker is a company called DTCC, Depository Trust & Clearing Corporation. Everyone calls it DTCC. DTCC has got various subsidiaries that do different things, but let’s just call it DTCC. It is a clearing broker, and that means it’s the ultimate buyer and seller of all the equity securities traded on most of the exchanges. So the clearing broker bears significant financial risks when a broker-dealer like Robinhood has a lot of individual customers rather than institutional customers because there’s a risk those customers—when they buy securities—will ultimately not pay for some reason. They either don’t have the money, or something’s happened and they don’t pay. That puts Robinhood in the awkward position of not being able to pay the clearing broker. As a result, when there’s a lot of activity by individual retail customers, clearing brokers worry that the financial obligations will not be made. They demand that broker-dealers lower in the chain, like Robinhood, put up more collateral in case the Robinhood customers did not pay. That’s what happened to Robinhood. There was a demand for very significant amounts of collateral—$3 billion was the initial request, and it was demanded on very short notice, early one morning before trading open. Robinhood could not immediately comply. It didn’t have the money. That meant that the clearinghouse would not clear trades for Robinhood. Therefore, Robinhood needed to cut back on the trading in certain stocks until Robinhood could raise cash to provide additional cash collateral to its clearing brokers. It did raise cash in a day or so—which was also, by the way, pretty remarkable—and then was able to reduce the trading restrictions on its customers. There’s nothing underhanded or conspiratorial here. The SEC supervises this area, supervises clearinghouses, supervises broker-dealers. A few bumps occurred because of the rapidity with which the clearinghouse demanded additional collateral, and Robinhood was forced to impose trading restrictions without a lot of notice to its customers. Those are not good features of what happened, but they’re fairly minor. That is one potential area for the SEC to look into, not to point fingers or with recriminations, but to see if there’s a way to improve collateral calls. Anyway, that’s what happened.

Accusations of Manipulation

KNIGHT: Now, in addition to Robinhood having allegations leveled against it, of course, both the shorts and the longs have had allegations leveled against them as well—questions about whether or not these online venues are havens of market manipulation, or on the other side, are the hedge funds pulling strings, either as you discussed, possibly at the broker-dealers, or on the online venues like Discord, Facebook and Reddit, to try to suppress the communication going on. Andy, I was wondering if you could quickly talk about the manipulation allegation because I know, as you’ve told me, that sounds broader than it is if you don’t understand the securities laws. If you could just go into that a little bit, I’d appreciate it.

VOLLMER: Sure. I’ll try to keep this brief. These are fairly technical areas in securities regulation. The principal point I want to sound here is that there had been a lot of claims of misconduct by various commentators about the behavior of the WallStreetBets group. I think that they have overreacted, and they have been rushing towards regulation. The trading activity that we saw in GameStop and other companies was not particularly harmful to the securities markets generally, and it was short term. The pro-regulation crowd does not need to rush in. The market began to correct itself within a short time, and there really was no damage to the general operation of the markets. Some investors made money. Some investors lost money. The two principal claims of misbehavior are, first, that the group communicating on WallStreetBets was engaged in a pump and dump. That is a classical type of misconduct. The core of it is a materially false or misleading statement to the market. People buy stock. Then they lie to the market about the prospects of the company. People start wanting to buy that stock because of the false statements. The price goes up, and the original people, the fraudsters, then sell the stock at a higher price, but it’s an artificial, inflated value. There’s no evidence that I’ve heard about so far that people were making false statements, materially false statements, to the marketplace. The SEC is looking. Maybe they’ll find something, but that’s not my understanding of what happened. Now, manipulation is the other big claim. You need to have a bad act for a manipulation to occur. A person needs to create the false impression of buying or selling activity. A classic example is a thing called a wash sale. That’s when one person owns several different legal entities, like little companies, and the person who’s the beneficial owner of all these different companies has the companies trade in a particular security, buy and sell frequently so that the market appears to be engaged in a lot of activity for that company. But the trades ultimately didn’t change ownership, beneficial ownership, even though they were traded from one company to another. That’s because there was ultimately a single owner of all the different companies. That’s called a wash sale. There are other types of true manipulations—a thing called a match trade—but it all involves fake trading activity. That’s not what happened. Here, we have the social group on WallStreetBets actually buying and selling securities. They had what I call market risk. That is a risk that that buyer or seller will make or lose money. If you have market risk, you’re not engaged in artificial trading, even if you have evil intent. Most people claim the manipulation was occurring because these buyers wanted the price to go up. It’s pretty hard to tell the difference between an evil intent to manipulate the price up and a person’s desire for a stock price to go up naturally because they bought the stock. This is a simplification of what’s a difficult area of law, and some important legal authorities have broader approaches, but the essence of a manipulation is buying or selling activity that is not genuine. Based on what I’ve heard so far, that’s not what happened.

Making Money and Punishing Hedge Funds

KNIGHT: Thanks, Andy. You mentioned something that I think opens up one of the most interesting points of discussion about this whole thing, and that’s motive because it seems to me that, at least for a nontrivial number of the people buying GameStop, for example, their motive isn’t the typical motive you expect when people buy stock, which is, I want to buy low and sell high and make money. Rather it is, we want to—as Martin referred to earlier—we want to punch the hedge funds. We want to strike a blow for justice or whatever, and GameStop is the vehicle, or AMC or whoever is the vehicle for this. Once you look at that, it seems to me that there are several different questions that people have to wrestle with. One is, should we view this—because a bunch of people probably made money; a bunch of people probably are going to lose money—should we view this as typical “bubbles”? I know that the concept of a bubble is somewhat controversial. Is this a case where people are . . . or let me rephrase in the negative—is this a case where a lot of people got what they paid for, even if they ended up losing money? If they made the hedge fund buy stock way higher than they anticipated, did they get what they paid for? Did they achieve their goal, such as it is?

RUSSO: Brian, my thought on that is, did they do it to make money or to punish the hedge funds? Why not both? This is actually pretty common in my understanding when you look at the trading behavior of institutional investors. The same shorts who were shorting GameStop have shorted many other companies. And when they go on TV, their common refrain is that they’re doing good business for America. They’re exposing companies that are valued too highly, or maybe may even be committing fraud. Now, to my knowledge, I don’t think anyone was claiming GameStop was committing fraud, but there are big examples like with Herbalife, where short sellers claim that it was a fraud perpetrated on the American people. Without justifying that claim either way, let me just say then that, in my view, that particular approach isn’t new. They’re looking to make money, and they’re looking to punish what they see as bad behavior. And exactly right. Some people here have made a lot of money. Some people have lost a lot of money. I’ve been asked—and I know people are asking—what are the consequences economically? Chairman Jay Powell was even asked this at the most recent FOMC press conference. His answer is one that I agree with, that so long as there’s not financial vulnerabilities being exposed, somebody making money in the market and somebody losing money in the market is not a threat to the economy, and it’s not a threat to your 401(k). What really matters for our retirement accounts and our general economic well-being as the public is the ability to have stable financial markets—stable in a broad sense of not worrying about any particular asset price—and the long-run growth of the economy. And this GameStop saga doesn’t seem to affect either. Chairman Powell was specific in thinking about his own view and the view of the Federal [Open] Market Committee on how they think about financial stability. He emphasized that when they look at financial stability, they’re interested in the broad range of asset prices relative to fundamentals. They’re not so concerned about any particular asset “bubble.”

Market Speed and Volatility

KNIGHT: I think to expand this out to the rest of the group here, one question that enters my mind is, do we have to be nervous that the stock market, which was built—and this is a simplification—but what was built to facilitate efficient capital access is potentially being more and more—let’s say that; who knows, maybe this is not the shape of things to come—but being more and more used as a tool to hash out social grievances or social fights? I forget the name—was it Pershing Square who was like, “Herbalife is a fraud”? Well, we have an FTC, and I’m not trying to say that those guys didn’t do what they should’ve done or whatever, but you see, you have it that way, and you have folks on WallStreetBets taking a position that these hedge funds are not misjudging the value of GameStop, but bad. And we see this in, of course, broader areas of the role, moving to using the market as a tool for social change broadly, or tribal conflict. I was just curious what people might think—should we be nervous about that since the system really wasn’t built with that use in mind?

GURRI: The web always accelerates the speed and magnifies the scale of engagement. I think one aspect that we have to dress for in the future is the fact that these volatile moments, which may flatten out within weeks and back into normality—but may not—are going to happen more and more. This community was 1 million or 2 million, WallStreetBets, when it started out. Within three or four days, it was 6 million. These were young people with a little bit of money each, but when you’re 6 million, that’s a lot of money being thrown around. I think being nervous is probably not unwise in terms of just the volatility of it. It does less, I think, the fact that the markets are being used as another conflict theory. I think that’s true of every corner of society today, essentially, is contested, but it’s just the speed at which this happens and the volumes which it can suddenly come to. I don’t know that that can be fixed. I don’t know if that should be fixed, but it’s something we should dress for in the future.

VOLLMER: Martin, if I could just clarify—of course, millions of people were on WallStreetBets and are on WallStreetBets. They’re able to use their limited capital together, in combination with leverage through derivatives, to make large-exposure bets. But I think we should also be clear that the idea of David versus Goliath is, in this case, just a story. There was lots of institutional money behind these trades, and I don’t think that all of the movement in GameStop, or maybe not even most of the movement in GameStop, is attributable to simple retail traders.

Is More Regulation Needed?

KNIGHT: I think one interesting question here about all of this is that there’s a lot of calls for regulation now. And, of course, to some degree, anytime something interesting or noteworthy occurs, there’s a call for regulation. I’m just curious as to what, if anything, has this experience exposed? You mentioned “clearing” earlier. What should we learn about clearing from this?

VOLLMER: If I could, I want to make a couple comments. I’ll try to be short. I think the securities markets worked really well. There was a lot of demand. There was a lot of trading activity, and the stock price went up because there was a lot of demand. The clearing brokers came in and operated to protect the financial position of the overall marketplace. All that is to the good. That’s one point I want to make. Second, even though I’m resisting the rush to regulate, and I am not seeing widespread, sustained social harm of the kind that would possibly justify new regulatory action, I don’t want it to sound like I’m encouraging the behavior of the individual retail investors who were communicating on WallStreetBets. I’m not. Brian, I agree with what you said. The securities markets have a different purpose. They’re not there to allow a tribe to identify itself or a tribe to band together to take down or injure some other group. The purpose of the securities markets is to allow companies who have good ideas to raise capital. These are good commercial ideas to raise capital and to let millions of investors make decisions about what are the good commercial ideas and what are not. That is not what was happening here. The behavior we saw with GameStop was not consistent with the purposes of the federal securities markets. I want to be clear about that. But it was limited to a very small number of companies’ stock, and it was short-lived behavior. I don’t think that it produced significant harms, either of the kind that Chair Powell was talking about—although he’s looking at a very macroeconomic view—or even to the securities markets. As I’ve said, I’ve just not seen the injury. The thing that bothers me the most—and I would love to hear the other panelists comment on this—the one thing that bothers me is whether society, our country, our regulators should have a response to a group of people who band together with the objective of causing harm to one or more other actors in the same marketplace. I agree with what Chris just said, by the way—it’s not entirely clear how large the group was that set out to cause the short squeeze. It certainly was a big part of the publicity about this, but we’ve also been reading more recently about institutional investors taking advantage of some of the trading activity to make profits. By the way, I totally approve. It’s fine. It’s not on fundamental value, but there’s a whole area of investing called momentum investing, and many of them were taking advantage of that. So I think we need some more facts about the extent to which a group of retail investors banded together through WallStreetBets to visit harm on others. If that turns out to be a significant area of action and conduct here, that bothers me. To me, it is just the electronic version of the mob gathering in the town square and deciding to go set fire to somebody’s shop. Notwithstanding certain kinds of constitutional protections for speech, we do not tolerate mob behavior that actually results in violence. Here we have economic violence, and we are very worried about drawing a line between threatened harm and free speech. Those are the troubling aspects to me, and I welcome comments from others.

Mob Behavior?

GURRI: I think it’s a fundamentally misleading parallel to call it a mob that engaged in destructive behavior in the sense that, as far as I know, no crimes were committed. They could all say if they wanted to—you line them up against the wall and say, “Why did you do this, young man?” They all would say, “I was trying to make money. We all work together in this group, and we all encouraged each other because we could do it.” The problem is structural. The problem is, when you have all these people and this very volatile environment of the web kind of herding—more of a herd than a mob, I think—stampeding in a certain direction, it can create a lot of volatility, a lot of turbulence. I don’t see that it is malicious. I see that as a structural problem of the information landscape that we have, more than an attempt by people to punish. If you’re trying to punish the hedge funds, the hedge funds could well be said to have asked for it. They had shorted GameStop so deeply. That would be my reaction to it. That said, the volatility and the structural question that we need to look at more than whether the mob is out there to destroy or to fight social justice games.

KNIGHT: Chris, you have something?

RUSSO: Yes, let me echo what Martin just said there. I think we need to tap the brakes on a language we use to describe these retail investors who are members of the public. Words are being used like mob, violence and harm when describing the trading activities of our fellow neighbors. Sure, some people gained money, some people lost money. This is perfectly normal and natural in a competitive financial market. Of course, Andy’s right—the purpose of having the securities markets, in my personal view—and I think it’s the view that he very well described—is to be able to provide capital for these great public companies by sourcing from the savings of the general public. But there is competition in financial markets, where if someone thinks something’s valued too highly, and someone else thinks it’s valued too lowly, they disagree. They make a bet, and bets being what they are, some people win and other people lose. To reemphasize, I don’t think that people winning or losing these sorts of bets are harmful to the financial industry or to the financial markets. In fact, this process, the market process, is what allows us to price the risk effectively, and that I see is really key to having markets work effectively.

What Are the Real Risks?

KNIGHT: Let me play devil’s advocate here for a second. We talk about pricing risk, but is the risk that a certain group of people—motivated by a sense of real or perceived injustice—is going to target your hedge fund because they don’t like hedge funds, if your hedge fund is emblematic of the problem? To my knowledge—and I could be wrong—it doesn’t seem like a lot of the WallStreetBets activity was based on a fundamental analysis of GameStop and, like, “Hey, these hedge funds are undervaluing GameStop. It really is worth $50 a share. Let’s short squeeze them.” It was as much, “Here’s an opportunity to jam up an institution we don’t like.” I guess one question is, if this is the shape of things to come—and that’s a huge “if,” but let’s just indulge it for a second—what does this mean in terms of the market’s ability to actually signal information? Do we go from the efficient market hypothesis to the efficient trolling hypothesis, where part of a stock’s price is whether or not somebody is using it to jam up some other third party? Again, to reiterate, it’s a very big “if” that this is the shape of things to come. Then, I guess, on the other side, to have some sympathy for Andy’s position but also to modify it somewhat, I do think we need to at least entertain the concern of markets being used to settle social scores because they’re not designed for that, and they don’t have the safeguards that a lot of the venues that are designed for that have. But of course, it’s not just the retail investor. If this is the mob, then is BlackRock rattling its saber over things—someone hiring the Pinkertons? Where is the parallel here? Of course, any analogy breaks down, and this analogy may not be particularly apt, but I personally think that there is, at some level, some concern if we start using markets that are designed for one thing, to use them for something that was really orthogonal to their purpose.

RUSSO: My view is that so long as financial markets are competitive, if someone tries to use the market in a way other than seeking profit by improving the pricing of risk, they’ll very quickly lose all their capital. You’re right to highlight that the GameStop saga is not one in which . . . The news about GameStop was great, which pushed up prices by an order of magnitude, and then the news was terrible, which caused prices to collapse. The run up and run down in stock price was not due to some change to the fundamental analysis. It was rational, though. It’s based on supply and demand like all markets are. It’s a supply and demand in the following sense. As I mentioned, people went short the GameStop stock. They really wanted to bet against this company, believing it was going to go down, even go down to zero. The way to think about this is like a game of musical chairs where all the hedge funds are dancing around the chairs while the music is playing, but if the music stops, they all need to scramble to find a chair, or else they’re bankrupt. What does that mean financially? What am I describing? I’m describing the fact that these hedge funds had shorted more than 140 percent of the float of stock outstanding. That means that if the price happened to go up—and in fact, we saw that it did—and lenders started to call these loans back, not all the hedge funds could meet their obligations. In fact, many failed to and lost billions of dollars. Seeing that overextension, I might call it greed, others not. But let’s describe it at least as placidly as we can. It’s an overextension by the hedge funds. Seeing that opportunity, retail traders and institutional traders took advantage. In any other circumstance, that’d be called arbitrage. As long as there wasn’t some sort of underlying crime—a distinction that I think Andy has described in some great detail—this would be fair play, and in my view, unless there is some sort of underlying crime like a pump and dump, it’s fair play.

Disclosure

RUSSO: The issue here, in my eyes, is how can we continue to make financial markets freer and fairer? I think that there can be changes on the regulatory side, and I’d be interested to hear Andy’s thoughts on two. The first is the issue of disclosure. I think Andy gave a great discussion of how the theories about Robinhood arbitrarily restricting trading to mess with the retail traders—that doesn’t seem to hold any water, but at least from what I’ve seen, the increases in margin requirement by the DTCC were selectively disclosed. They were disclosed to Robinhood and other brokerages. Hypothetically, that information could have been circulated around to institutional traders with privileged access to knowledge. Knowing that demand for stock would then be cut if retail traders could no longer submit buy orders, that would have a predictably materially negative impact on price. My concern about selective disclosure in this case is that, by giving someone informational advantage, it gave the public a disadvantage when trading opened the next day. So it’s one question—can we have changes to the regulatory disclosure scheme used by the DTCC to make sure that everyone is properly informed without changes to margin requirements and other regulatory changes? The second point is, some economists have thought about bypassing this entire issue, bypassing the notion of short squeezes by allowing companies to issue more shares in such a circumstance. If the short squeeze is a circumstance where there’s just too few shares for the market to function effectively, why not allow GameStop, or another company in a similar situation, to issue more shares?

KNIGHT: I believe AMC actually was able to issue shares because they had a preplanned announcement, like, “We are going to issue shares at a certain point.” And they just got really lucky. Anyway, Andy, do you have any response to Chris’s questions?

VOLLMER: On the disclosure about the way the central clearing firms are operating with the broker-dealer members and the like—generally, I’m in favor of getting news like that out. Generally, that’s the position of the federal securities laws is to make information more available. In principle, I think all that’s fine. Two slight hesitations. One is, there is a lot of information available to the customers of Robinhood. The account agreement between Robinhood, the broker-dealer, and its customers will disclose a lot of things that can happen that will cause Robinhood to take various remedial measures, like restricting trading activity. My hunch—I have not reviewed the Robinhood broker-dealer account agreement—but my hunch is, it probably preserves the ability of Robinhood to take certain actions when its clearing brokers demand additional collateral or take some other steps against Robinhood. So, I think that a lot of information is available. Certainly, all the rules that govern the behavior of DTCC are publicly available. Now, one of Chris’s main points is, “But we needed to know that DTCC made a demand for collateral from Robinhood on this particular day, and Robinhood needed to make clear to the public how it was going to respond.” My only other hesitation is a minor one, and that is there are ultimately some financial privacy issues about the operations of Robinhood and about its customers that we want to be sensitive to. There is a lot of financial information made available, so I do not want to overstate this. Generally, I’m all in favor of additional disclosures. DTCC and Robinhood might have been able to publicize more than they did. By the way, I think Robinhood was very public pretty quickly about things that were going on, but I’m not certain of that. Second, about short squeezes—of course, Chris makes a very good point. Ultimately though, I don’t think short squeezes are about the number of shares available. There’s almost an inexhaustible number of shares from a company. A company can issue shares and can split its shares, essentially at no cost if it wants to provide additional shares to the market. But certainly, what is bothering Chris, and what I see as a legitimate concern, is that the short interest was greater than the total number of shares available to be traded in the market, so that is some worry. But basically, a short squeeze is more about prices and capital available to people who are trying to cause the short squeeze than it is about the number of shares available, just as a general matter for shorting purposes.

Lightning Round

KNIGHT: This has been a great conversation. I’d like to start bringing it to a close here. I’m going to do a lightning round around the panel on if you could tell—when he’s confirmed—the new chair of the SEC or whoever your preferred policymaker may be—one lesson to learn out of this, what would it be? Chris, let’s start with you because I’m looking at you right now.

RUSSO: My view is that if we’re going to change regulation, regulation should simply be enhanced to ensure that the access and disclosure for financial market participants is provided equitably to everybody, including the public.

KNIGHT: Great. Martin?

GURRI: I don’t talk to policymakers much, but if I were to talk to them on this—and nobody would ask my advice on financial markets, I hope—but I would tell them, “You have lost control, and you probably have lost control permanently.” I think the information structure of our society today is such that this may never happen again, or it may happen in far more serious and persistent and long-lasting ways. The idea that we can play whack-a-mole with this stuff, I think, is the 20th century—we are in charge. We can allow things to happen or not happen in a sense that if I look at the policymaker that I’m talking to, and I look at that WallStreetBets community, it’s like this is two different species of humans. I think, basically, the second one is making the first one lose control.

KNIGHT: Thanks, Martin. Andy?

VOLLMER: I want policymakers to be very thoughtful and cautious before they move to adopt some new type of regulation. Every government rule restricts what people can do. If we have more regulation, if we have a new area of regulation because of this event, which, as I said, was limited to a small number of securities and to a short time period—and as Martin just said, it might not happen again—but every effort to regulate restricts individual liberty and personal freedom, and we should not do that lightly. The history and tradition of the country is to the opposite. It’s one of our foremost values in the United States, is the preservation of personal freedom. We should regulate only if there’s a serious and widespread harm that occurs and is likely to repeat.

KNIGHT: Well, I’d like to thank the panelists for a stimulating discussion today, and I’d like to thank you for listening. I hope you found this as entertaining and informative as I have. This is Brian Knight. Thank you very much.