The regulators are determined to prevent the “madness” of GameStop again; but how?

Days will tell if Gamestop affair Is a passing event or foretoken, But in the meantime various factors in the American financial and political system are pushing towards an in-depth investigation that will prevent such a spin from recurring. The pressure is so great that any regulatory authority that has even the slightest connection, to the point, has promised to thoroughly investigate the affair.
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So far, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and the chairman of the CFTC have announced the opening of official investigations. Yellen even managed to summon the entire top of the financial regulation for an emergency hearing.

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Gamestop stock

Days will tell if the GameStop affair is a passing event or a sign of things to come

(Photo: shutterstock)

Meanwhile, the Securities and Exchange Commission (SEC), whose new chairman has yet to be approved, issued a general statement examining the events, even explaining that they have already begun scanning social networks to see if a few more individual users are disseminating misinformation or fueling markets. In the meantime, the Senate oversight committee convened an emergency hearing on the issue last Thursday, under the recorded name: “The game stops? Who wins and loses when shortlisters, social media and retail investors collide.”

What exactly was there? The small investors in Robinhood have called on the social network Reddit, targeted the videostore chain of gamestops and sent its stock to extreme rises – and the hedge funds for a painful squeeze short.

Opinions are now divided on what exactly the authorities should investigate and by whom. The stock volatility? The Robinhood, the digital trading platform that was forced to stop trading stocks for a few tense moments? Maybe even the activities of the small traders, to understand if there was an illegal manipulation? Or the hedge fund activity, or that of the big lenders that provide the financial security cushions for all of these together?

Financial regulators, as usual, adhere to the “little person protection” narrative. The announcements of interrogations and discussions on the subject were similar to each other and seemed like a kind of clutch movement: on the one hand self-patting on the shoulder and a praise of the supervising body, and on the other hand a summary of the motives of their recent moves. “Our core infrastructure in the market has proven to be flexible, under the weight of exceptional trading volumes this week,” the Securities Authority said, concluding, “However, extreme stock price volatility has the potential to expose investors to quick and severe losses and undermine market confidence.”

“We really need to make sure that our financial markets are functioning properly and efficiently, and that investors are protected,” Yellen said. “A lot of people take a lot of risk, which they don’t quite understand,” said Congressman Jim Haims, a former Goldman Sachs banker who sits on the financial services committee. “Unfortunately, the most effective remedy for this is to touch a hot stove.”

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Ylen: Ylen:

Yellen: “People take a lot of risk, which they do not fully understand”

(Photo: AP)

Market makers hear these words and do not know their souls – joy or sorrow. A regulatory effort has been in the interest of hedge fund managers and other large institutions, to return some of their certainty to the market in which they operate or have been managing for years.

Gamestop events and the massive acquisition of shares by Reddit users have been experienced by some large investors as a weakness, due to their failure to spot the sentiment of the masses towards one stock. On the other hand, it is also perceived as a random and illogical event, which produces momentary discomfort about the future of the market. A kind of existential anxiety, even if erroneous and disproportionate, that control flows. The way that seemed reasonable to those financial foxes to deal with this disadvantage was to shout at it instead and demand that the platforms where the crowd is king be scrutinized. The madness must stop.

Regulators and the media have also adopted the same narrative of “frenzy” (Frenzy or Crazy), blatantly undermining the idea that people can act in a way that is not in line with the status quo and still maintain their sanity. Accordingly, Reddit traders have been given low and dismissive nicknames like “young,” or those who make them a homogeneous collective as “military,” rather than older people who make big-risk financial decisions – just like any experienced Wall Street investor.

This framing suffers from inconsistencies, especially as U.S. financial markets sanctify freedom and self-correction capabilities. There is only one rationale left to serve: a bet on your money – bad, a bet on others’ pension money – good. But this rationale is not backed up by facts. In fact, as the storm subsided, and after at least the first wave of Reddit traders calmed down, the real picture became clear: there is no madness. The small Reddit investors did nothing that threatened the integrity of the financial system. The opposite is true: the system functioned just as it used to function after years of diminishing regulation – a casino where the house always wins.

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A branch of the Gamestop toy storeA branch of the Gamestop toy store

Restricting investors contradicts the sacred American principle of a free market

(Photo: Shutterstock)

With the exception of one hedge fund, not one according to which anything will be settled, everything worked properly. Most small traders who paid too much for a battered stock lost their money; A series of hedge funds earned several hundred million dollars each on holdings in GameStop and AMC at the expense of those small traders; The world’s largest asset manager Blackrock enjoyed a jump in its 13% stake in GameStop, earning more than $ 1 billion by some estimates; Robinhood attracted a million new users and raised $ 3 billion from shareholders; And some underwriters recorded huge commissions. Not a bad work week for a crazy market that suffers from an army attack by young people.

If overall the market worked as it was supposed to work, what do regulators have to complain about? They are left with two options for shaping the future. First, a rigid regulatory hand towards hedge funds whose activity – shorting stocks – has created an opening for small traders to push for deep losses of one fund or another. Second, to choose to restrict the trading of small investors, it is likely that by placing high barriers to entry. The first option is unlikely, because many regulators believe that hedge fund activity is essentially healthy and efficient for the market.

This is while the second option undermines the prevailing principle in American culture, which sanctifies the free market. This is such a strong principle that when Robinhood stopped trading in shares, both Progressive Democratic congresswoman Alexandria Oxio-Cortez and conservative Republican senator Ted Cruz agreed – perhaps for the first time ever for these political rivals – that it was a complete disaster for the petty bourgeoisie.

While none of these options seem particularly plausible, and assuming regulators are not known for the Zeitgeist’s creativity, innovation or deep understanding, real change is unlikely to come. Those who are likely to change are the hedge funds, which already in the spirit of the period began to look for employees to serve as “sentiment traders”.

According to a Bloomberg News report last week, job requirements include more than a year of membership in the HardStreetBets group and a high ranking on the social network, along with a lack of economics or finance so the candidate is “free from any normal financial brainwashing.” Hedge funds understand that it is not necessary to defeat the small traders in their small game, but only to take care to utilize them well.

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