REGULATIONS SET TO PROTECT SMALL INVESTORS LIMIT THEIR FREEDOM

In theory, all investors – big and small – have equal rights, but it is just a theory which has been debunked by wallstreetbets and their GameStop gig.

Published

February 4, 2022

“All animals are equal, but some are more equal than others.” The famous quote from ‘Animal Farm’ by George Orwell, commonly used to explain social disparities, could easily apply to capital markets. In theory, all investors – big and small – have equal rights. What’s more – several complex and all-mighty institutions have been established to protect small fish from sharks. So much for the theory.

Civilizations have been built on trade – since the dawn of time, people have been exchanging goods, ideas, money, bonds, shares, derivatives, bitcoins… The benches have become banks, open-air stock exchanges – virtual, automated trading floors.

However, one condition had to be met – free trade. It’s not a coincidence that systems trying to control the free movement of goods, capital, and ideas had eventually collapsed. In contrast, mutual trust, and deals completed with handshakes, contributed to expansion and wealth.

Also, trading on stock exchanges was based on trust, at least in the early days.

With time, especially since the end of the 1920s, when Wall Street suffered a tremendous crash, trade gradually became subject to various regulations aimed primarily at protecting small investors and levelling their chances in “clashing” with “big fish,” or sharks. As a result, what should regulate the market itself began to be the domain of officials. Step by step, the regulators – despite their best intentions – instead of helping small investors, harmed them more. That led to an explicit limitation of freedom of speech – from now on, you had to be careful who you talk to, what you talk about, and how you do it. All this so as not to be accused of manipulations and actions contrary to the new law.

Information has always been more valuable than gold. Yet, under the current rules, any piece of relevant news first reaches the richest and the largest funds, and only later, through the media, becomes available to all unprivileged retail investors.

When the unprivileged – threatened by big guys – team up and take decisive steps to fight the predators, the regulators’ uproar rises. The very same regulators that were supposed to protect them. What has recently happened to GameStop, a publicly listed video game retailer, makes a vivid example.

The pandemic-induced lockdown was a severe blow to retailers operating from physical outlets. As a result, the share price plummeted, and the troubled entities became the subject of massive short selling, where professional investors borrow shares of stock to sell and then buy back later at lower prices and to cash profits. The short-selling is a bet that the cornered company will collapse. The short-selling is a gamble: any positive news about the stock can push the price up, putting short-sellers in a difficult spot.

That’s what’s happened with GameStop: small investors – users of online service Reddit – via one of its sub forum – wallstreetbets – started to widespread news suggesting the company is ripe for a ride. As a result, GameStop shares began to recover thanks to its fans. That convinced the investors to change plans, which, in turn, accelerated the shares’ swell. In three sessions, the valuation rose 243 %, and in a month – six-fold.

Like the European Supervisory Authority ESMA, regulating bodies criticized the action. Still, it focused on the weakest and smallest players, who had their opinions and decided to share them with other people.

Yet, it turned out that private investors exercising the fundamental right to express an opinion and act following them in the market face various constraints, and their fully legal activities are demonized. At the same time, the actions taken by huge funds are largely ignored. The truth is, small investors do not stand a chance against the wealthy Wall Street whales, especially when the bodies established to protect the weaker seem to favour the more potent, giving their huge capitals an advantage. Are all animals equal?

BigShortBets Talks is a series of articles and interviews created in cooperation with real writers and entrepreneurs that gives the opportunity to grasp a new perspective on modern economy, markets and regulations.”

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