Subscriber Survey

Regulatory crackdown on trading platforms like Robinhood unnecessary, subscribers say

The Robinhood Markets logo is seen displayed on a smartphone screen. Rafael Henrique/SOPA Images/LightRocket via Getty Images

A majority of The Logic’s subscribers said GameStop’s short-squeeze saga should not lead to greater regulation of day-trading platforms, a recent survey found.

“It’s not the day-trading platforms which are broken,” one respondent wrote.

Fifty-five per cent of respondents rejected the notion of more regulation. Twenty-three per cent said a regulatory crackdown was necessary, and 17 per cent answered “Maybe.” Five per cent said they didn’t know.

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The Logic emailed subscribers a private link to an online survey on January 29, and the survey closed February 1. Respondents’ identities were kept anonymous and duplicates were removed as needed. Subscribers were asked, “Do you support the day-trader movement or are you concerned about the impact it may have on market stability?” Their choices were: “I support the day-trader movement,” “I’m concerned about the impact it may have on market stability,” “Both,” “Neither,” and “I don’t know.” They were also asked, “Should the short squeeze lead to greater regulation of day-trading platforms?” Their choices were: “Yes,” “No,” “Maybe,” “I don’t know.”

The ongoing GameStop stock drama has thrust trading platforms like Robinhood and Wealthsimple further into the spotlight, amid a boom in at-home investing throughout the pandemic. Last week, Robinhood attracted widespread criticism, accusations of market manipulation and dozens of lawsuits after restricting the purchases of affected stocks. CEO Vladimir Tenev later told Elon Musk during a Clubhouse call that the freeze was done out of financial necessity, saying the company had run out of funds to fulfill transactions. Tenev is expected to testify before the U.S. House Financial Services Committee later this month. Meanwhile, Toronto-based Wealthsimple’s platform didn’t halt trading as demand soared to record numbers.

Shares in GameStop have dropped about 73 per cent since their peak last week. With the endgame now in sight, regulators including the U.S. Securities and Exchange Commission are following the matter. Canada’s provincial securities watchdogs and the national investment-industry regulator have promised to take “appropriate regulatory action to protect investors” if “abusive or manipulative trading activity” is found.

Though it’s not clear what playbook, if any, is available to regulators, the majority of The Logic’s subscribers said they didn’t think that day-trading platforms, or retail investors, should be targeted.

One subscriber wrote, “Scrutinizing the tools that individuals use to create their own financial wealth while leaving out questions around Wall Street and Bay Street institutions that have largely avoided the consequences of their reckless greed is missing the point of this moment.”

Many subscribers said they’d prefer to see the events lead to greater regulation of market manipulation through short selling. 

“Why is naked shorting possible? That’s the real problem here,” one subscriber wrote.

Many subscribers said regulations should be applied uniformly.

“There should be one set of rules, and retail investors don’t seem to have broken any of them, whereas institutional investors seemingly have,” one respondent wrote.

Some subscribers who weren’t in favour of new regulations for day-trading platforms supported mild consumer protections, including existing disclaimers and warnings that caution retail traders. Wealthsimple issued warnings on four securities caught up in the stock run last week, and sent an email to customers about the risks of emotion-fuelled trading. (Wealthsimple’s rating continued to rise this month in The Logic’s sentiment index. It remains the highest rated of all Canadian private technology companies, ahead of the country’s Big Five banks).

Another subscriber wrote that Robinhood’s freeze on meme stocks should be investigated, and that the company should not be allowed to go public until it makes “significant changes to optimize for the wellbeing of its users.”

Several subscribers in favour of greater platform regulation scrutinized Robinhood’s model and its decision to halt trades.

“Robinhood was unprepared to manage the trading frenzy and needed to shore up its balance sheet with significant capital. This is not a realistic management model for these services,” one respondent said.

Some suggested that regulations may be helpful when retail traders use margin accounts, rather than paying cash for trades. Others pointed out that individuals require greater protections than corporate entities.

“I’m only worried about folks who could make losses that they cannot absorb (unlike hedge funds),” one wrote.

Many subscribers fell somewhere in the middle.

“Just because I support day-trading showing the hypocrisy of the stock market does not mean I am in favour of an entirely unregulated market. I may not like short-squeezing, but I also don’t like shorting,” one said.

The Logic also asked subscribers whether they supported the day-trader movement or were concerned about the impact it may have on market stability. Forty-three per cent of respondents said they supported the movement; 16 per cent said they were concerned about its potential impact on market stability; 28 per cent responded “Both.”

Many subscribers said that markets should be accessible to everyone, and that day traders have simply highlighted pre-existing market issues.

“If anything needs to change, it’s the rules of the game,” one wrote.

One subscriber wrote that thousands of coordinated retail buyers were no more monolithic or uncompetitive than a “huge hedge fund” buying or selling millions of dollars of shares at a time.

Several subscribers who said that they were concerned about market stability wrote that investing that isn’t based on fundamentals and a company’s performance distorts the market and risks creating bubbles. 

Other subscribers were concerned about the quality of the information that retail investors are getting from social media sites like Reddit, which are susceptible to manipulation.

Many subscribers were torn in both their support for day traders and concerns about market stability.

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“The Redditors are reckless, and I don’t know how long they can expect to keep winning. On the other hand, everything about shorting stocks strikes me as amoral, and it’s incredibly satisfying to watch them lose,” one wrote.