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Let the Game(Stop) Begin—Unless You Are a Retail Investor

May 12, 2021, 8:01 AM

Gone are the days when you had to walk into a physical branch to open a brokerage account. Each trade used to cost money, and account minimums were high. Not anymore. Now any American with internet access and a bank account (even ones with low balances) can open up a brokerage account from the comfort of their home and trade commission-free.

To put it bluntly: Opening a brokerage account is no longer reserved for the rich and privileged. You may have heard some of these rich, privileged investors gush that the stock market has generated transformative wealth over time. They’re right. The S&P has returned 212,524.72% since 1950—and unfortunately most of these returns went to said rich people (in turn, making them richer). Mobile brokerage platforms have now fundamentally changed the brokerage landscape— expanding access to the stock market from some to all.

So how are securities regulators reacting to the unprecedented democratization of the securities markets? Not well. Regulators, as well as some on Wall Street, are bemoaning the rise of the retail investor and their technological enablers.

The Financial Industry Regulatory Authority, the Securities and Exchange Commission, state securities regulators, and now even Congress have highlighted the apparent dangers associated with retail investors having instant access to the securities markets through mobile brokerage platforms.

By pushing trading commissions to zero and providing simple, straightforward interfaces, these platforms have apparently ‘gamified’ stock trading. According to regulators, these platforms have created a casino-like environment that promotes speculative trading activity.

They are wrong. Do we really believe, as securities regulators have suggested, that the sinister use of colors (yes, colors) in mobile brokerage applications, easy to use interfaces, free trading, and the use of digital confetti, constitutes gamification of the stock market?

If true, it would seem odd then that institutional investors have been treating the stock market like a casino for years (sans confetti). In fact, institutional investors have made lucrative careers out of gambling on the stock market, buying second homes, planes, and even major league baseball teams with their winnings.

So what gives? Why are retail investors and the mobile brokerage platforms that enable their access to the markets suddenly facing the ire of securities regulators? What began, at least from FINRA’s perspective, as a congressional mandate to ensure that access to the stock market is fair, has paradoxically resulted in the suggestion that retail investors should somehow not be afforded the same trading opportunities as those of their rich, institutional counterparts.

While retail investors no doubt require additional and thorough regulatory safeguards, the desire to protect these retail investors must not come at the expense of fair access to the markets. We solidly believe in, and support, the robust protections afforded to retail investors by retail broker-dealers, including mobile brokerage platforms. In fact, we have helped many of the nation’s largest and most popular mobile brokerage platforms institute robust and sophisticated customer protection policies.

GameStop: What Happened?

However, mobile brokerage platforms are not to blame for the gamification of the stock market. They have simply pulled up more chairs to the table. Yet regulators, and many on Wall Street, would still have you believe that the result of all of this unchecked, mobile brokerage fueled gambling is what led to the events surrounding GameStop (GME).

As many are no doubt aware, a handful of institutional investors speculated against GME and heavily shorted the stock (in the process borrowing more shares of GME than actually existed), and then proceeded to collectively lose more than $20 billion when thousands of retail investors, predominantly using mobile brokerage platforms, ran up the price of GME, effecting a short squeeze. Many have assailed these retail investors as wild speculators, akin to feverish poker players going ‘all-in’ on a losing hand.

But the events surrounding GME are not new. Investors have taken short positions in the past and been burned, and GME wasn’t the first, and certainly will not be the last ‘short squeeze’. The only difference between the events surrounding GME and countless prior short squeezes are the players involved.

By breaking down traditional barriers to entry, providing accessibility through technology, and reducing commissions to zero, mobile brokerage platforms have finally expanded meaningful access to the markets to retail investors. Vlad Tenev, CEO of Robinhood, perhaps the most recognizable mobile brokerage platform, said as much when he appeared in front of the House Financial Services Committee in February to defend, in part, the actions and practices of mobile brokerage platforms.

What he did not say, but what we will, is that suggesting that retail investors abstain (or be prohibited) from speculating on the stock market ignores what we all already know to be true—that the stock market served as a glorified casino long before the advent of mobile brokerage platforms. Now at least, retail investors have the ability to place their bets, too.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Ethan Silver chairs Lowenstein Sandler’s fintech practice. He advises technology-focused broker-dealers, digital-advisors and cryptocurrency, blockchain and digital asset businesses on formation, structuring and regulatory matters as well as navigating federal and state regulatory frameworks and FINRA rules.

William Brannan, counsel at Lowenstein Sandler, advises regulated fintech companies navigating complex securities, derivatives, and cryptocurrency regulatory issues. He also advises cryptocurrency exchanges, custodians, and securities trading platforms on federal securities laws, FINRA rules, security-based swap rules, state money transmitter licensing requirements, and the New York BitLicense.

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