Joseph Candelaria – Currently, the most impactful stockbrokers are not on Wall Street, but instead are on Reddit. Online day trading by amateurs has become increasingly popular during the COVID-19 pandemic, shown by investing app Robinhood’s 3 million usership increase at the start of 2020. Novice and experienced day traders started to share their wins, losses, jokes, and trading tips in online forums like Reddit’s r/WallStreetBets. Now, the influence of these forums has grabbed the attention of professionals on Wall Street. Roves of day traders, following the lead of prominent posters on r/WallStreetBets, have coordinated a collective effort to skyrocket the stock of seemingly archaic but beloved companies like GameStop, AMC, and Blackberry. This movement was largely done in an effort to topple corporate hedge funds who hoped to profit off of these dying companies by shorting their stocks. The plan worked to perfection, as hedge funds are currently losing billions of dollars daily in what is known as a short squeeze, where shorting investors attempting to minimize their losses purchase back the rising stocks that they anticipated to decline, further driving up the stock’s price and potentially infinitely compounding investors’ losses. However, the success of r/WallStreetBets has raised questions of whether coordinated, but not deceitful, online efforts to drive up the price of a stock is in violation of securities law.
Market manipulation law has been known to be a vague topic and one without a clear criterion. It was established with the intent to protect unknowing traders from making investments based off of deceit and willful spreading of misinformation. The United States Code defines market manipulation as to “effect, alone or with 1 or more other persons, a series of transactions in any security . . . creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.” This definition, however, is hardly useful, as it would include the core purpose of trading stocks: aiming for your purchase of a stock to increase the stock’s price, leading to other people buying the same stock and increasing your returns.
Because of this issue, the Commodity Futures Trading Commission created a four-prong test for market manipulation based off of common law, that includes “(1) That the accused had the ability to influence market prices; (2) that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand; (3) that artificial prices existed; and (4) that the accused caused the artificial prices.” Traditionally, this test is applied to schemes known as “pump and dumps,” where someone circulates false or misleading information about a company in which they own stock in order to induce market interest in that company and increase their return on the investment. Generally, market manipulation schemes arise in situations like these where there are “artificial prices” that are not grounded in “legitimate forces of supply and demand,” because of their predatory nature.
However, the case of GameStop differs from traditional pump and dump schemes because there are no lies being spread, no new investors left in the dark, and no deceiving tactics. The reasons for the skyrocketing stock are well publicized and are open in online forums that are accessible to everyone. Some found powerful hedge funds in a weak position and wanted to capitalize in a show of defiance against these large financial institutions. Others, innocently, just joined along for the laughs. Still, in order for this movement to survive, it needs to be answered whether the organizations like the SEC would consider GameStop’s investors’ motives as “legitimate forces of supply and demand.” Some that have cashed in on GameStop stock point to the company’s new director appointments that project to be favorable for GameStop’s prospects of venturing into the digital realm, but do these new board members warrant a 428% increase in the company’s stock price in the month of January? It seems as though the question will be answered sooner rather than later, as the Biden administration is already reportedly “monitoring” the situation. Time will tell whether Reddit forums will be able to successfully topple corporate hedge funds and take over as the overwhelming force in the American stock market or instead succumb to legal scrutiny for being market manipulators.