Yellen and Regulators Met Amid GameStop Frenzy to Discuss Market Volatility
Barbara Roper, the director of investor protection for the Consumer Federation of America, said policing that type of behavior will be more difficult for the S.E.C.
“We’re better at regulating professional market participants than figuring out what to do when the investing population itself is driving this,” Ms. Roper said.
The S.E.C. is likely to focus on Robinhood and other technology platforms that enabled the investing, including allowing investors to trade options — a financial product that appears to have exacerbated some of the huge price swings in GameStop. Options are essentially contracts that give the buyer the right to buy or sell a stock at a given price at some point in the future. That type of trading can be both risky and disruptive, market experts said.
“The options trading rules are overdue for review,” Ms. Roper said. “There are supposed to be safeguards in place that limit option trading to more sophisticated traders or at least make sure investors understand the risks.”
Instead, Robinhood and other platforms allowed any investor to buy options with the push of a button.
“The S.E.C. will need a hypothesis. Mine is that the problem is largely a problem of leverage and that leverage comes about by the trading of options rather than individual shares,” said James Cox, a securities professor at Duke University School of Law. “We may need to really think whether there needs to be a limit on how many options a person can have and is able to execute.”
[Read more about how options trading might be fueling a stock market bubble.]
In addition to the risks of options trading, the S.E.C. may also focus on whether any of the incentives and marketing that lured investors to new financial technology platforms was misleading. Many companies, including Robinhood, have touted “commission-free” investing, which many investors may have misunderstood, said Dennis Kelleher, president of Better Markets.
“The reason many of these people are in the trading arena at all is that they were induced into it by a misleading claim that trading is ‘free,’ and now many of them think there’s free money falling all over the place,” Mr. Kelleher said. “The S.E.C. should take the position that anyone claiming directly or indirectly that trading is free is false and misleading to a reasonable investor.”