(NYTIMES) – There will be academic case studies on the mania around GameStop’s stock. There will be philosophical debates about whether this was a genuine protest against hedge funds and inequality or a pump-and-dump scheme masquerading as a moral crusade.<\/p>\n
What the Reddit investors did, more than anything else, was demonstrate in the starkest terms that they could manipulate the market in the way that so many in the public believe hedge funds and wealthy investors do every day.<\/p>\n
In doing so, they exposed the fallacy that the stock market was ever a level playing field.<\/p>\n
So now what? If any good can come from this beyond the feel-good story of some retail traders profiting at the expense of hedge funds, it requires a real conversation about how to make a more fair market that nobody can manipulate, that provides the same opportunities for everyone to create wealth.<\/p>\n
Here are a handful of policy ideas to help level the playing field. Think of them as conversation starters, not endorsements. Each has pros and cons and likely some unintended consequences.<\/p>\n
One of the arguments repeatedly made by critics of Wall Street is that high-frequency traders – who are buying and selling in milliseconds – have made a mockery of the idea of actual investing.<\/p>\n
These traders are often taking advantage of price discrepancies using algorithms in a way that no retail investor has any opportunity to do, creating great wealth at firms like Citadel and Virtu Financial.<\/p>\n
A transaction tax of even 0.1 per cent on the value of trades would not only raise nearly US$80 billion (S$106 billion) a year, but it would also meaningfully reduce high-frequency trading by making it less profitable.<\/p>\n
Bills have been proposed in Congress repeatedly for such a tax and struck down.<\/p>\n
The cons: Proponents of high-frequency trading say that it creates more competition and, therefore, makes the market more efficient for all participants, including retail investors.<\/p>\n
Big hedge funds have to disclose their “long” positions when they cross the threshold of owning 5 per cent or more of a company’s shares. No such disclosure is required for “short” positions. At all.<\/p>\n
Shouldn’t there be? If we as a society believe transparency is important to understand who is buying up shares, it would seem logical that we also want to know who is betting against them.<\/p>\n
Some people believe that short selling itself should be banned, but others believe it performs an important policing function by incentivising shareholders to scrutinise companies for fraud, chicanery or simple mismanagement.<\/p>\n
The cons: If short sellers were forced to disclose their bets, they could find it difficult to build meaningful positions. Shorting a stock can take time, and building the position could make them targets of investors who might put them in a short squeeze, similar to what we saw play out over the past week.<\/p>\n
Passing important information that is not publicly disclosed to all investors is illegal. But big investors travel across the country constantly to visit chief executives and privately grill them about their businesses.<\/p>\n
The retail investor cannot get in on these meetings. While most executives are careful not to pass news of impending earnings or a merger, it is hard to believe big investors would spend the time and money to get to these meetings if they did not believe it provided them an edge they could not get otherwise.<\/p>\n
The cons: Companies often say they want to hear from their biggest investors and get feedback on their performance. Some big investors also say that given the amount of money at stake – especially when making a long-term investment commitment – they want to know the management team personally.<\/p>\n
In 2012, then President Barack Obama proposed what was called the Buffett Rule, a minimum effective tax of 30 per cent for anyone with an income over US$1 million.<\/p>\n
It was named after billionaire investor Warren Buffett, who said he should not be able to pay a lower effective tax rate than his secretary. It meant that no loopholes – via capital gains, carried interest or estate tax manoeuvres – could be used by the wealthy to lower their taxes.<\/p>\n
While the Buffett Rule will not change opportunities in the market, it might help foster a sense of fairness in the system, which is partly what the GameStop trade is about. People want to believe that everyone is paying their fair share.<\/p>\n
The cons: There are no cons to creating more trust.<\/p>\n
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