What do we want from stock market regulators in the wake of the Robinhood and Reddit revolutions?
First, we want awareness that something big has happened and has caught almost everyone in Washington and on Wall Street unaware: millions of new people, encouraged by opportunities to augment their paychecks, have discovered the stock market as a wealth creator and they want their chance to profit freely and fairly from it.
Chiefly because of commission free trading but also because of a well-made app from Robinhood, we know that more than 17 million people in a few years time have been investing and trading to try to make more with their money, which is the definition of success on both Wall and Main Streets. That's terrific and we want to see it continue. Robinhood has been an equalizing force on Wall Street and has gotten ahead of the equalizing forces in Washington which, while tending to lag, are lagging big this time around. I am optimistic that Gary Gensler, the new head of the SEC, will work quickly to try get Washington to see the positives of more involvement by more people, especially younger people.
So, if it is so darned positive to get so many people in, then why have we gotten so off course so quickly? How did it get to the point where Robinhood has gone from the liberator to someone perceived in the Twitter-sphere often as the oppressor?
Simple: the system that allows you to buy something and get it into your account or sell something and get it out is antiquated. It actually resembles more of a checking account clearing operation then a modern day credit card business, to use a system we trust.
At the most trying and taxing moments two weeks ago I think it might have been difficult for the people at Robinhood to know who owed what and who had to advance capital and didn't and who would therefore be defaulting forcing Robinhood to make up the difference. If a client from Schwab (SCHW) bought something and that security came from Robinhood, Robinhood can't default if a merryman defaulted to Robinhood. The firm makes good, not the account, so there were extreme funding pressures.
If the infrastructure weren't so antediluvian - something Robinhood CEO Vlad Tenev talked cogently about last week, then much of what occurred wouldn't have. Right now we have a system where most stocks settle or are cleared by the second business day after the trade.
It should be by the second business second. But that's not the rule. That' got to change or we will not be able to say with any certainty what happened 10 days ago will not happen again. It's a technology issue and it has to be fixed now. That's what we want from Washington.
Secondarily we need to get the regulators to be mission-driven when it comes to leveling the playing field but agnostic-driven when it comes to demons because that gets us nowhere, although, at times, pre-Jimmy Chill, it has been my predilection. Everyone hates hedge funds except who work at or service them and the occasional self-hating manager. Nobody likes a short-seller if the short seller is betting against you, but short sellers create more sellers and more liquidity, which means more, deeper, markets which are per se a good thing. We do need regulators to be more pro-active above trying to flag things like GameStop (GME) where there were so many more shares sold short than seemed possible, which is what caused the ease with which that conflagration started.
I think if the regulators really want to do their job they should insist that margin, the ability to borrow, be more strictly controlled so people can't hurt themselves. Force the brokers to explain the risk. Second, options are great instruments - I was once one of the largest options traders on Wall Street and I am a big believer in their ability to make you money if you know the rules -- and have experienced a level of new interest that makes me concerned that the risks aren't understood. We all have a right to lose money but let's at least understand why these instruments might magnify the loss. Make the risks better known.
Third, very simple: no paternalism. These new investors and traders are, as a whole, incredibly resourceful and research oriented and they have seen so much money made in individual stocks like Tesla (TSLA) or Amazon (AMZN) or Apple (AAPL) that they just don't want to own only index funds. Support, them, agree with them. That's the best possible thing you can do.