Just a few days after the release of Edelman Trust Barometer Titled “Declaring Information Bankrupt,” Wall Street experienced an information crisis first-hand, courtesy of Reddit and GameStop. January’s wild ride put a focus on investment against speculation in relation to gambling, in the context of an environment where many betting outlets have been suspended due to COVID-19, and where technology has enabled free and fast access to markets.
This has attracted many new market players. How will they fare in the long run? Will it democratize markets and make them more inclusive, so that more people benefit from the creation of long-term value? Or will it lead to a different “investor class” that sees investing as a new form of (sometimes very expensive) entertainment?
In our 2020 Investor Confidence Survey, we found that only 39% of retail investors without an advisor say financial market information is trustworthy, compared to 61% agreeing among those with an advisor. Similarly, only 57% of those without an advisor believe they have a fair opportunity to profit from investing in capital markets, but this percentage rises to 81% among those with an advisor. A trusted advisor makes all the difference.
THE The GameStop fiasco completely relieved the lack of confidence in the market. Hearings are scheduled for House Financial Services Committee And Senate Banking Committee of the US Congress. The CFA Institute will actively follow these events and we are engaging with various industry players on investor protection and ways to foster market integrity and transparency.
But GameStop is only one aspect of a larger trajectory. In 2017, the CFA Institute’s Future of Finance team presented the scenarios of fintech and parallel worlds in Future state of the investment profession. We suggested that an accelerated flow of disruption from technological innovation was likely and that mass disaffection linked to alter-globalism and populism could impact markets. Social media, we noted, has vast potential both to bring people together and to divide them.
To get some insight into these questions and the way forward, we interviewed Jon Stein, CFA, Founder of Betterment and Fellow of the CFA Institute Advisory Council on the Future of Financefor his perspective on the state of GameStop and the future of online financial platforms.
CFA Institute: We are talking to many investors about whether GameStop’s situation was about market manipulation, and many questions remain. Does the market infrastructure need to change? Is the social media narrative now powerful enough to impact market prices?
Jon Stein, CFA: It looks like the retail investor is having a moment, and this is the next logical step in what we’ve seen in terms of social platforms discussing investing, the ability to trade for free on a phone, and tweets investment from influencers like Elon Musk, all combined with the use of social media as a tool for disruption.
Social media was supposed to help democracy, but we realize it can break it. Is it the same with social networks and finance? Today, an individual retail investor can do the same thing traders did via Bloomberg chat many years ago in relative secrecy, but now it’s public and the market responds faster. Therefore, we are going to have to think about the regulations. (Note to readers: The CFA Institute Standards of Professional Conduct state: “Members and Candidates shall not engage in practices that distort prices or artificially inflate trading volume for the purpose of misleading market participants.”)
Should we regulate the steps in the settlement process? We don’t want to regulate speech or prohibit people from investing, but we do care about investor protection.
Recent events haven’t been terrible for the investor, but they haven’t been good either. Trading for short-term profit does not help society. These actions, however, are taken by the same people politicians usually try to protect. These actions have been value destroying and a waste of time, just like gambling. So maybe it should be taxed like gambling. It’s fun, but it doesn’t create value and isn’t a productive activity.
We had the same day-trading dynamics but with less sophisticated technology in the dot-com boom and global financial crisis (GFC). Is it helpful for the CFA Institute and other market advocacy organizations to continue to warn of the dangers of day trading? Or does it only feed the perception of an exclusive “establishment”?
The CFA Institute must continue to say this because the raison d’être of the markets is to raise capital. This speculative activity as we have seen does not pursue these ends.
To those who argue that the system is broken, we must acknowledge that not all correlations between value and price are broken. You must give credit to roaring kitty – it was a great trade – but we need to encourage proper capital allocation. There shouldn’t be any wild price swings unless there is some news.
How should we think about new speed bumps, since there are no transaction costs now? It doesn’t have to be a regressive flat tax, but it could instead be progressive. For example, in casinos, you tend to pay taxes once your winnings exceed a certain amount. This reinforces the idea that as you move up the ladder, you need to be more thoughtful.
Are you concerned about gamification and how some platforms use tricks to trick people into trading against their own interests?
This is happening more and more. Journalists don’t write about the losers, only the $40 million winner. Betterment and other big companies for retail investors won’t rush into this space because it’s not good for the brand in the long run when it ends up going bad. Regulators will have to step in at some point.
You can check out the TechCrunch video I did this with Vlad Tenev, the founder of Robinhood, in 2016 to hear us talk about how we designed our business models. Just because something is online doesn’t mean it’s alike, and we’ve been focused on aligning interests with our investors.
There are examples of using gamification to benefit customers. Businesses can use prompts and contests to encourage people to save more. It comes down to product design and company incentives.
It seems that the “democratization of markets” should really be about the “democratization of value creation”.
Yes, I completely agree. And remember, just because something has no commission doesn’t mean it’s truly free. Like eating at McDonald’s: it might not cost you a lot of money today, but it will cost you in terms of your health.
You should want transparency, and if you’re not paying for something, you should ask questions.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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