Why the Freakout About GameStop?

Podcast - Bob Zadek Show

English - February 28, 2021 15:27 - 71.8 MB - ★★★★★ - 6 ratings
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Jennifer Schulp on the function of markets and financial regulation

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You’ve most likely heard by now of the GameStop phenomenon – the bizarre saga of an online forum, short-selling hedge funds, app-based trading platforms, and stock market volatility. Now that the dust is beginning to settle, we can see more clearly what this phenomenon actually is, and more importantly, whether it calls for more regulation of financial markets.

If you’re not up-to-date on what happened, watch this short video:

Jennifer J. Schulp – the Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives for the Cato Institute – recently delivered testimony on the subject before the House Committee on Financial Services. In it, she defends “retail investing,” i.e., participation by everyday people in the markets alongside more sophisticated institutional investing.

New technology and app-based trading platforms like Robinhood have enabled a new class of investors to make small, highly leveraged bets. The stereotype has been that a majority of these retails investors are no match for the wit and resources of the “smart" money” on Wall Street. But when a band of video-game-loving GameStop loyalists on Reddit saw the usual suspects short-selling $GME into oblivion, they saw an opportunity to push back and send the stock price sky high. This left hedge funds with short positions (like Melvin Capital) holding the bag to the tune of billions of dollars owed to those to whom they promised to buy back the shares which they lent out at the lower price.

Unsurprisingly, both hedge funds and regulators are now calling for more oversight of retail investment, calling it “market manipulation.” The new investors in GameStop who contributed to the stock price rally say that they’re only doing what the hedge funds have been doing all along – with the roles reversed.

Jennifer joins me this Sunday to explain why restricting retail investors’ access to the markets would be a mistake with likely unintended consequences. Who’s to say that the Reddit mob didn’t have better information than the “smart money”? And what about freedom of contract?

Is this just another example of pitchfork populism run amok, or are we seeing markets evolve into something even better and more efficient at aggregating information?

Find out this Sunday, on the show of ideas, not attitude.

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