Congress And The SEC Are Getting Basically Everything Wrong In Trying To Respond To ‘Meme Stocks’

As you’ll recall, a year and a half ago, much of the world who didn’t live on the WallStreetBets forum were introduced to the concept of meme stocks. As we discussed at the time, much of the embrace of such stocks by retail investors was really about people who were fed up with feeling like the entire financial system was rigged against them, and in favor of those already rich and powerful. The underlying concept that drove much of the meme stock effort was about every day investors trying to assert some pushback on the underlying system.

That’s not to say that the meme stocks worked out well for everyone. Plenty of people did lose money, because that’s part of the nature of investing. There’s an underlying myth that the entirety of meme stock investing was about ignorant investors doing silly things, but doing so en masse to effectively counter for their own ignorance. And, surely, there were some retail investors who just went along for the ride, for the lolz, or whatever. But especially with the original meme stock, GameStop, the core of that deal was a retail investor who had done a ton of research, had a real game plan, and a real argument for why the stock was undervalued.

Ever since then, however, there’s been scrambling by “the system” to deal with “the problem” of meme stocks. And, yes, there are a lot of questionable underlying assumptions that meme stocks are, indeed, a problem. A few weeks ago, the SEC launched its very, very weird response to the whole meme stock thing by trying to create a meme of its own, with a very, very cringeworthy video called Investomania.

So… a few comments on this. First off, encouraging anyone who is looking to invest to do some research is a reasonable enough message on its own, but this is the exact wrong way to deliver this message. The people who are into meme stocks quite reasonably mocked the SEC mercilessly for this nonsense.

And, yes, I’m sure you can piece together the sad logic by SEC folks that resulted in them taking this approach: these are meme stocks, so the people who are interested in them like memes, so let’s create a meme! That’ll do it!

But, again, that totally misunderstands what’s going on here. The general focus of the meme stock world is sticking it to the system that is rigged against them. The SEC is the system. The SEC is the Man. Having the system you’re trying to stick it to, then turn around and suggest that everyone investing in meme stocks is an idiot who doesn’t do research not only gets the message wrong, it targets the message in exactly the wrong way.

The Man can’t meme about why those trying to stick it to the man shouldn’t fall for meme stocks.

Yes, people investing in stocks should do research, and you’re very likely to lose a lot of money just chasing after dumb ideas, but this video is not actually targeting the people who just go along for the ride, but rather the people who are doing their research and are trying to make a difference against the underlying rigged system — while the SEC seems to be pretending that the system is fine, it’s just you stupid retail investors who are the problem.

And… now it’s getting worse, because Congress is getting involved.

The U.S. House Committee on Financial Services on Friday called for the SEC, along with other regulators, to do more to protect the markets from similar events.

The impetus for change came from the so-called “Reddit rally” of January 2021, in which GameStop Corp and other “meme stocks” popular on social media surged to extreme highs on buying from investors trading heavily through Robinhood and other commission-free retail brokerages.

The intense volatility led to big losses for hedge funds that had bet against the meme stocks.

Notice the language here. “Protect the markets.” Because it was “the markets” that suffered? No, as later noted, it was some hedge funds that had bet against these stocks that lost. They don’t need to be protected.

All this kind of thing does is make people even more sure the system itself is rigged against the everday retail investor.

Now, there are reasonable concerns that the SEC has about “payment for order flow” and how that creates potentially questionable incentives for firms like Robinhood, which really pioneered the zero commission trade setup after realizing that they could just sell their deal flow through Citadel, allowing that firm to pre-run the market. The main issue there is that companies like Robinhood get paid more for a larger order flow, which gives them incentive to, in turn, encourage retail investors to trade more.

But, it’s reasonable to be skeptical about whether the SEC’s and Congress’ actual concerns are about systems that may encourage retail investors to trade too much… or if it’s really about “protecting the market” in the form of protecting the hedge funds that lost a bunch of money.