By Rep. Warren Davidson for RealClearMarkets
Activist investors have wreaked havoc on Wall Street this week, nearly bankrupting hedge funds, juicing the stock prices of fading companies, and most importantly, exposing the two-tier financial system.
In broad daylight, some of the most famous online brokers in the world showed that they only believe in a free market in theory.
Robinhood, the app that democratized retail investing by allowing users to do commission-free deals, offers the richest irony.
Now that High Street has market intelligence and the ability to sell stocks and buy options, the very firms that opened the stock market to millions have seen a change of heart.
It all started with a meme on Reddit’s subreddit r / WallStreetBets. Amateur market watchers believed that hedge funds had undervalued the performance of brick-and-mortar GameStop, which hedge funds are betting heavily on.
Redditors and other retail investors jointly bought the stock, triggering brief pressures that added GameStop’s value even further as hedge fund managers covered their shorts and continued to inflate GameStop stocks despite problems with the retail business.
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Covering the shorts costs hedge funds like Melvin Capital and Citron Research billions.
For once, Main Street wasn’t squashed. Amateur investors, known as “stupid money,” beat the pros in a system that hedge funds believed were cornered.
That was until Robinhood channeled its Inner Sheriff of Nottingham by preventing users from buying GameStop and others in the r / WallStreetBets basket with preferred stocks.
It also tightened the margin requirements on buying the stock and encouraged users to liquidate them. While this may primarily have been an appropriate standard, their actions in this trade clearly benefit hedge funds.
Meanwhile, hedge funds within Wall Street struggled to buy and sell the same stocks, adjusting their balance sheets to curb their own bleeding, while broker-dealers kept private investors from getting on the buy side of the market.
Despite this apparent disruption in the market, some funds have suffered a total loss of their positions.
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This raises a number of questions about market participation.
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Some Margin Account Authorized Retail Investors have been surprised to learn that Margin Accounts may contain Margin Calls. If those accounts don’t have enough funds, stocks are sold to cover the call.
Wall Street pros point to this lack of sophistication as a reason they shouldn’t be competing directly with average investors.
When Robinhood and TD Ameritrade prevented investors from buying stocks under a thin veneer of paternalism and concerns about volatility, it is another barrier for Americans actively trying to enter a market they were told it was “free and open”.
After those barriers to participation in the exchange were removed, these online brokers lifted the drawbridge and sealed the gates for retail investors.
With the Federal Reserve keeping interest rates near zero, there is little incentive or reason for Americans to keep cash in traditional savings accounts.
Over the course of the pandemic, the dollar has lost value and purchasing power as the Fed devalued the currency. Even Wall Street professionals went out of their way to switch from cash to other instruments.
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This has increased asset prices, distorted markets and associated systemic risks for the markets.
Remember, most Americans are locked out of private capital markets that are only open to accredited investors.
“Accredited Investors” are defined by the SEC as those who have earned more than $ 200,000 in the past two years, have a net worth of $ 1 million, or hold a position in high finance with a company that deals in unregistered securities.
These rules are intended to protect investors. However, this paternalistic approach creates obstacles that most Americans cannot overcome and excludes an entire investment road.
The House Financial Services Committee has already promised an investigation into the extremely unusual practices of Robinhood and other online brokers.
Many critics have rightly raised questions about Robinhood’s cozy relationship with Citadel Capital, which facilitated transactions for Robinhood and also bailed out Melvin Capital this week.
I look forward to the discussion on this and related topics.
In my view, some astute investors have identified certain circumstances that enabled them to take advantage of Wall Street’s overly risky position. In doing so, these private investors transferred money from the pockets of the hedge funds into their own pockets.
This should be celebrated and promoted as it shows that the markets are not exclusive but inclusive.
We must not allow Wall Street insiders to ban trading with outsiders.
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Syndicated with permission from RealClearWire.
Warren Davidson Rep. Is a Republican representing the 8th Congressional District of Ohio.
The opinions of contributors and / or content partners are their own and do not necessarily reflect the views of The Political Insider.