investing with a smart phone / vgajic

This article appears in the February 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

The emergence of the “meme stock” reveals that financial services regulators must be equipped to contend with the revolution in how information is being distributed and consumed online.

When a stock’s share price shoots up (or down) for no discernible reason and with no relation to the issuing company’s underlying fundamentals, regulators naturally are alarmed. For example, massive, unjustified price jumps are almost always followed by precipitous drops that leave someone holding the bag — typically naive retail investors who bought at the top before the balloon deflated.

Ordinarily, rapid, unwarranted price moves prompt regulators to demand that companies issue statements about whether they have actual news to justify the froth. This practice seems quaint in the modern world, but made sense when news generally flowed from companies down to investors and was often filtered through the regulated investment industry along the way.

Retail investors used to get their information from financial statements and analyst reports received in the mail. Now, the flow of information is much more chaotic.

The internet has decentralized and democratized the creation and dissemination of information. Investors don’t have to wait for annual reports. Instead, investors can cruise innumerable websites and social media sources. With the advent of nearly free trading, they can quickly and easily hop in and out of a stock for whatever reason catches their fancy — to buy and hold an investment for retirement, say, or to join an online mob attacking a short-squeezed hedge fund.

The challenge for regulators is to find a way to police misinformation and manipulation in an online world in which traditional standards of truth and accuracy no longer apply.

For financial markets to work in the long term, regulators must be able to take a stand against deliberate deception. Trading stocks as a joke is fine, as long as everyone’s in on the joke. When someone’s being duped, that’s a problem.