What’s Next, After the GameStop Frenzy?

And why this story is far from over.

Feb 10, 2021
Finance

SMITH BRAIN TRUST  As the GameStop trading frenzy died down, new questions were being asked about the Robinhood trading app, Reddit forum r/WallStreetBets and the future of short selling. Among them: “What does all this mean for retail and institutional investors?”

Albert “Pete” Kyle, Charles E. Smith Chair in Finance and Distinguished University Professor at Maryland Smith, joined a Georgetown-hosted panel to discuss that question among other implications.

The online discussion was moderated by CNBC’s Guy Adami, who said market watchers can expect “a lot more” to be revealed in the coming weeks.

Kyle says regulators should look at whether there was any price manipulation. “We don’t have all the facts in. But price manipulation can take different forms. One is telling other people who trust you to buy, when you’re actually selling behind their back. That sounds somewhat fraudulent to me. But it’s certainly behavior – that [regulators should look for]. 

“Another, different kind of behavior is misbehavior in the stock lending market. If you were sitting on collateral and not lending it out for the purpose of driving the stock up so that you or perhaps your co-conspirators could sell it – that’s another form of manipulation that the regulators should take a look at.”

Kyle also weighed in on whether the wild price action reflected a kind of “gamifying” of the stock market. 

“I’ve spent a lot of my career modeling markets using the technique of ‘game theory,’ but gamification in this case is different,” he said. “Gamification is exploiting a tendency in human nature – that we like to trade. … It’s deeply ingrained in us. And the retail people who trade stocks have to realize that it’s not like you’re betting on the Super Bowl, where you’re not a player.  You’re not going to get hurt by a violent tackle.”

In the stock market, you are a player, Kyle added. “And if you step out on the ‘field of GameStop’ to trade that stock you might get injured – pretty seriously – because there are bigger players out there – institutional investors, many of whom are pension funds managing billions of dollars and have professionalized staff. 

“And they may know more than you about what they’re doing. So, the optimal solution for someone who’s not the best player is to minimize physical contact. And that could mean investing in diversified mutual funds and not trading them that often.”

Get more insights from Kyle via the entire discussion at Retail Investors Shake Up Wall Street. What’s Next?

GET SMITH BRAIN TRUST DELIVERED
TO YOUR INBOX EVERY WEEK

SUBSCRIBE NOW

About the Expert(s)

Pete Kyle

Albert S. (Pete) Kyle has been the Charles E. Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business since 2006. He earned is B.S. degree in mathematics from Davidson College (summa cum laude, 1974), studied philosophy and economics at Oxford University as a Rhodes Scholar from Texas (Merton College, 1974-1976, and Nuffiled College, 1976-1977), and completed his Ph.D. in economics at the University of Chicago in 1981. He has been a professor at Princeton University (1981-1987), the University of California Berkeley (1987-1992), and Duke University (1992-2006).

More In

Finance

Climate Change Scenarios and Risk Management

How can institutions prepare meaningful climate change scenarios for decision making and risk management?

Feb 16, 2021
What's Up With GameStop?

Few would have guessed that GameStop would be Wall Street’s most eye-popping stock to watch. Our experts explain the frenzy.

Jan 28, 2021
Why Did Stocks Surge After the Capitol Violence?

Markets abhor uncertainty. So why were investors buying stocks after a day of violence and chaos at the U.S. Capitol? 

Jan 13, 2021
Robert H. Smith School of Business
Map of Robert H. Smith School of Business
University of Maryland
Robert H. Smith School of Business
Van Munching Hall
College Park MD 20742
SmithInfo@umd.edu