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Friday, January 21, 2022

GAMESTOP AND THE SMALL INVESTOR: IS IT A PUMP AND DUMP?

David Jones
David Jones is has over 20 years of experience working in the financial services industry. He holds the Series 7, 66, insurance, and real estate licenses.

Just imagine buying a stock at a low and riding it up to unbelievable highs with everyone talking about it. Small investors on the website Reddit and its message board, Wall Street Bets, are doing precisely this with different stocks such as AMC, GameStop, silver miners, and the Canadian marijuana companies. These stocks are moving at unprecedented speed and becoming the most talked about on the internet. Some in Congress and the news media claim that a new era is emerging with small investors dominating Wall Street hedge funds. They feel that these message boards offer a way of leveling the playing field. Beneath the surface, this frenzy is a mania, leading to fundamental changes. They are impacting small investors, trading, and the Wall Street establishment.

 

History, the New Era, and is it Different this Time?

We all like to feel that times are different from the past with technology, lifestyle, and human evolution. The reality is the forces of fear and greed influence stocks, commodities, currency, and real estate. These emotions create situations like what we see in GameStop and AMC, where everybody says it is different this time. But, history says no and it shows that they are eventually wrong.

In 1954, Humphrey Neill published a book called The Art of Contrarian Thinking. He says that frenzies like Reddit and Wall Street Bets are common throughout history. Emotions get the best of people and they don’t look at what is happening. It causes asset prices to shoot up and down from not realizing that people are pushing them up with no fundamentals. He cites how this continues in cycles but is in new forms and different. Some examples include 1929, 1972, 1987, 1999, and 2007. In all of these cases, small investors were changing things, only to find out that their emotions pushed prices to the point that they were unsustainable.

The moves with Reddit and Wall Street Bets are similar to 1999. Back then, the message boards on Yahoo were talking up internet stocks and they were reaching new highs. A flurry of buying occurred with small investors using online trading to pick up these stocks. Once prices reached a certain point, they crashed and most investors lost everything. The moves in GameStop, AMC, and others promoted on Reddit create adverse outcomes for a new group of investors. In the case of GameStop, prices were reaching $483.00 at the end of January and fell 91%. These trends continue recently, with investors chasing the next good stocks, such as the silver miners and marijuana producers.

 

PHOTO CREDIT: Realimage/Alamy Stock Photo

Future Regulations of Reddit and the Technology Companies

Regulators are retroactive and respond after the fact, with hearings and new legislation. The situation in Reddit and on sites such as Facebook, Twitter, and others is facing increasing scrutiny from regulators. The Securities and Exchange Commission (SEC) is investigating what happened to see who was making the posts and their purchases. The SEC wants to know if a select group of people use Reddit to push up stocks like GameStop after they purchase shares for themselves and then sell it on the run-up (commonly called a pump and dump scheme).

Treasury Secretary Janet Yellen is working with other agencies to look into new regulations of technology companies such as Reddit. Commenting about these investigations, an unnamed source at the US Treasury said, “These actions are more than likely the start of a larger investigation into technology companies. There is support in Congress and among regulators to determine the role they play in everything from helping to incite different groups such as the Proud Boys to what happened with Reddit. Everything is on the table at this point.” These insights are showing that more regulations are coming. Situations like what happened with Reddit and Wall Street Bets are only furthering investigations and regulation.

Recently, Senator Amy Klobuchar announced that she is introducing a bill that will use antitrust laws to control the size and activities of big tech. The assault on the US capitol and the role of Twitter and other technology firms are raising the ire of lawmakers and regulators. It is not enough to simply ban content that is manipulative and harmful, but more needs to be done in taking proactive steps. Congresswoman Maxine Water (D-CA) is holding hearings on these events to figure out what is going on. A source with her office said, “We are concerned about the gamification and manipulation of stocks like GameStop. We want to ensure that the markets work in a fair and orderly fashion.”  All of this shows that technology platforms lead to these types of situations, fueling the scrutiny.

The issues with Reddit and the Wall Street Bets message boards are facing increasing regulation and oversight. They promote emotional frenzies from small investors who say things are different this time. After these incidents, the entire tech sector is dealing with the possibility of more regulations. The most significant issues are what they will look like and how it affects everything from politics to personal finance.

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