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Gamification

The recent volatility of stocks like GameStop and AMC has led to increased scrutiny by both market regulators as well as elected officials. The first significant investigation was conducted in the House Financial Services Committee when both retail and institutional investors alike testified on February 18, 2021. Following that, the Senate Banking Committee held its own hearing on March 9, 2021. The results of the hearings has done little to control the volatility of the securities in question.


On Wednesday, GameStop shares were approaching $350 and the surge had Redditors calling for a new peak price. This increase was short lived as the stock fell to $172 in a matter of minutes before settling at a more stable price of around $260. The volatility caused several pauses in trading and the Alternative Uptick Rule was activated for at least the second time over the past several weeks. The Alternative Uptick Rule is designed to be used during times of high volatility for a security and activates when the stock price falls by more than 10% in a day. This is accomplished by not allowing short sellers to sell on downticks forcing them to sell their short orders on market upticks. Since the Rule was put in effect, GameStop share prices have experienced less volatility than that of the previous weeks while still continuing to gain.


As market regulators and elected officials are still trying to grasp the implications of the wild volatility experienced by stocks that have been shorted by some hedge funds, it seems clear that some changes will be coming, or at least are being discussed. Among the options being discussed are: payment for order flow, redesign of stock trading applications and an age requirement to be allowed to trade. The most complicated of these is the Payment for Order Flow; simply put, this is a system that allows zero-commission brokerages to make money on trades by fulfilling buy orders at a certain price by buying sell orders at a slightly lower price and then reselling them to the purchaser. The concern, as voiced by Gina-Gail Fletcher, Professor of Law at Duke University is that it "creates a conflict of interest because brokers are incentivized to put their own profit seeking interests above the interest of their client". Currently, some senators are calling for this practice to be banned while others are urging caution and arguing that no action should be taken without a proper investigation being conducted by the Securities Exchange Commission. With regards to the app design, it has been argued that the style of some trading platforms feels too much like a video game and can lull users into a false sense of security while they risk significant sums of money. The last of these three is implementing an age restriction for trading. This could look like bans seen in casinos requiring users of trading platforms to certify that they are at least 21 years of age before being allowed to invest.


These are not the only aspects of the situation being investigated by legislative committees and it seems clear that some changes will be coming. When and what those changes will be is still an unknown and it seems likely that the market will continue to run its course for the time being. The flood of new investors coming into the market with a limited understanding of the risks they are taking certainly calls into question what, if any role, the government should play in ensuring that these investors have received some education as to their exposure to these risks. The low barriers to entry coupled with new economic stimulus payments will likely see more, not less volatility in the market over the coming weeks. With the most recent economic stimulus payments slated to begin hitting accounts this weekend, the market could be in for a volatile week.


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1 Comment


Daniel Hailpern
Daniel Hailpern
May 03, 2021

I’m not too sure if raising the age to join is the best move. While I agree that younger traders may be playing into meme stocks more and causing more volatility by day trading like it is a game, I would argue, like you, that education is a better move. Investing is good for everyone. The economy will flourish if more money is being invested by all people, not just the ultra rich. It also gives younger voices the ability to back brands they believe in and grow their value while also getting a return, unlike a gofundme or other similar crowd funding that is mostly a one way street.


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