On Thursday, March 4th, 2021 Tuck Professors Peter Fisher, Under Secretary of the United States Treasury for Domestic Finance from 2001-2003; and Curt Welling, who served as president and chief executive officer of AmeriCares for 11 years; met with Dartmouth students and community members at the Rockefeller Center’s second-to-last Rocky Watch event of the winter term. Rocky Watch is a weekly series of live broadcasts that create a virtual common space for community discussion and engagement in this time of remote learning.
The topic of the discussion was the severe price volatility seen in the stocks of companies such as GameStop and AMC last month. The discussion was moderated by Jason Barabas, director of the Rockefeller Center.
For context, GameStop and a number of other companies saw their stock prices rise by stratospheric amounts last month, in part due to investment by retail investors who coordinated with one another through the website Reddit and purchased stock on the app Robinhood. These investments forced a short squeeze by professional hedge fund managers who had assumed that these stocks would go down, forcing them to cover their bets or risk catastrophic losses.
Professor Welling began by summarizing the main actors of the crisis. According to Welling, the first group was regulators; the second was investors, in particular, retail investors who “account for between 15-20% of… trading volume;” the third was information providers, entities that report on market activity and aim to “maximize the impact of their research;” and the fourth was brokers and dealers, “intensely for-profit entities” that have lost influence as independent market makers execute “extraordinary volumes of trades.”
In light of last month’s instability, Professor Fisher began his remarks by asking why we regulate securities markets. In Fisher’s view, regulation is often paternalistic but has the laudable intent of preventing severe market volatility. The question of regulation is especially pressing today—individual investors are able to easily execute stock transactions due to commission-free apps like Robinhood and “the very easy monetary policy that the Fed has engineered.” This friendly investment climate has enabled the “gamification of trading,” in which investors employ “fast and loose momentum-based trading strategies” to maximize their profits, with market volatility being a byproduct of this.
When pressed on what actors were primarily responsible for last month’s volatility, both Fisher and Welling rejected the narrative that stock surges were driven purely by a wave of discontented retail investors operating on platforms like Reddit. As we learn more, it appears increasingly likely that established Wall Street actors had a hand in driving up stock prices.
Next, Professor Barabas asked the panelists about the role that Robinhood played in the crisis. Generally, Fisher sees the ease of executing stock transactions on Robinhood as encouraging more frequent and risky trading. “Just as my iPhone induces me towards addictive behavior… so too it seems the online brokerage industry has figured out how to get us to spend more time in front of our trading screens,” Fisher explained.
On the topic of why Robinhood suspended trading of GameStop stock at the height of the frenzy, Professor Fisher noted the complexity of the regulations governing capital requirements at clearinghouses like Robinhood. With market volatility or changes in volume of transactions, it stands to reason that clearinghouses need more “margin, more collateral… to secure against any one broker failing.” Though Robinhood’s decision to lower trade volume by suspending trading of GameStop was unique, it was an important way to reduce risk until it received more collateral.
“It’s extremely unlikely that many… retail investors understand the complexity of the settlement and margin rules that operate behind all of this trading,” Welling said. Thus, even if Robinhood acted in line with regulations, its decision to stop trading “is a perfect set of facts to hypothesize conspiracy because it seems unfair.”
Other topics discussed included the potential of online misinformation to influence markets. According to Fisher, “it seems extremely likely… that there may be alternative facts that are being exchanged by [online investment communities] just as there were alternative facts that were exchanged by people on January 6th.” This is a major problem because online platforms are disinclined for a variety of reasons to independently edit or validate information.
Finally, when asked about the need for future regulation, Welling described the securities markets in the United States as having served the economy “very well.” However, episodes of market volatility in the U.S. have the potential to undermine the credibility of the U.S. internationally, making regulation important to maintaining the standing of the U.S. in the global economy.
Written by Ben Vagle ’22, Rockefeller Center Student Assistant for Public Programs