What’s Next, After the GameStop Frenzy?

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?