Barbara Roper, director of investor protection for the Consumer Federation of America, said monitoring this type of behavior is becoming more difficult for the SEC
“We are better at regulating professional market participants than figuring out what to do when the investing population is doing it themselves,” said Ms. Roper.
The SEC is likely to focus on Robinhood and other technology platforms that enabled investing, including the ability for investors to trade options – a financial product that appears to have exacerbated some of the huge price volatility in GameStop. Options are essentially contracts that give the buyer the right to buy or sell a stock at a specific price at a later date. This type of trading can be both risky and disruptive, said market experts.
“The rules for options trading are overdue for review,” said Ms. Roper. “Safety precautions should be taken that limit options trading to more sophisticated traders or at least ensure that investors understand the risks.”
Instead, Robinhood and other platforms made it possible for any investor to buy options at the touch of a button.
“The SEC will need a hypothesis. Mine is that the problem is largely a leverage problem, and that leverage comes from trading options rather than individual stocks, ”said James Cox, professor of securities at Duke University School of Law. “We may really need to think about whether there needs to be a limit to the number of options a person can have and can perform.”
[Read more about how options trading might be fueling a stock market bubble.]
In addition to the risks of options trading, the SEC may also focus on whether the incentives and marketing that have lured investors to new financial technology platforms have been misleading. Many companies, including Robinhood, have been promoting “commission-free” investments that many investors may have misunderstood, said Dennis Kelleher, president of Better Markets.
“The reason a lot of these people are in the trading arena in the first place is because they were led to do so by the misleading claim that trading is ‘free’, and now many of them think that free money is falling everywhere,” said Mr Said Kelleher. “The SEC should take the position that anyone who claims, directly or indirectly, that trading is free, is bogus and is misleading to a reasonable investor.”
