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Jan 27, 2021

Regulators unlikely to halt Reddit-fuelled stock surges: Securities lawyer

'Regulators need to think beyond enforcement': Susan Kushneryk on regulating Reddit


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Financial market regulators would be hard-pressed to crack down on retail investors involved in driving up the prices on a slate of stocks, according to one Toronto lawyer specializing in securities law.

Susan Kushneryk, a partner at Hansell LLP, said in an interview Wednesday that barring any illegal activity or evidence of share-price manipulation, discussions over trading intentions or investing ideas fall outside the purview of regulators.

“People talking about stocks, creating buzz around stocks; that’s nothing new. We’ve seen that before. The issue is that if people are doing it to engage in manipulation, that’s wrongful activity,” she said.

“The regulators don’t regulate anything outside that illegal activity. And, they don’t regulate what investors say to each other about what’s going on with any particular stocks, or their trading intentions or musing about trading. So it really comes down to whether there’s any illegal activity or any manipulation.”

Shares in a number of companies, including GameStop Corp., BlackBerry Ltd. and AMC Entertainment Corp. have gone parabolic over the last week, in part driven by retail investors who congregate in the popular Reddit thread r/WallStreetBets. The sometimes-profane community, which is now 2.8 million members strong, has focused its attention on heavily-shorted stocks, which has led to a short-squeeze of epic proportions and has wreaked havoc on institutional investors betting against those stocks.

While the melt-up has triggered a number of trading halts on the shares in question, thus far regulators have shown no appetite to policing the discussions on online platforms.

Kushneryk said the online coordination of that investment community has a parallel with political movements south of the border, where activists and demonstrators have taken to the web to organize their movements.

“The analogous conduct that we’ve all seen, writ large, in the last couple of years, is in respect to U.S. politics and the impact of activity in social media on politics and how that’s actually translated into real action,” she said.

“I think - like what we’re seeing here - people may be dismissive of chats going on in chatrooms and otherwise online in platforms that may be not as mainstream as mainstream media. And what we’re seeing is that those chats and what’s going on in those forums are actually having a real-world impact, and we saw that in the U.S. Capitol a couple weeks ago.

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That retail investor frenzy has caused hedge fund manager Michael Burry - made famous for his bets against the U.S. subprime mortgage market in Michael Lewis’ book The Big Short - to call for further legal and regulatory scrutiny to be directed at the retail investor base. In a tweet, Burry described the action in shares of GameStop as “unnatural, insane, and dangerous,” as hedge funds were forced to close out their short positions in the stock at a significant loss.

While the platform for retail investors to discuss their may have changed, Kushneryk said this kind of activity from retail investors is nothing new, likening it to the euphoria that led to the dot-com bubble and bust 20 years ago.

“There have been, frankly, [examples of] baseless excitement that has caused real investment decisions, that have caused real harm,” she said.

“I think that the regulators do need to be thinking about it, but it may be where the regulators need to be thinking really hard beyond its enforcement mandate.”

Kushneryk said that regulators should perhaps redouble their efforts to improve investor education resources in order to prevent less sophisticated investors from being swept up in the speculative mania.

“It may be that what the regulators need to be thinking about is investor education and financial literacy,” she said.

“If that investor is more informed about how to actually evaluate the companies in which they want to invest, how to consider company fundamentals, how to think about long-term growth, how to think about all the important things other than just the price fluctuation, that could be a real help to that investor and could help mitigate the potential risks being created by all this chatter on these platforms.”

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