It’s not often that a story about stock-market volatility becomes a trending subject for late night comedians. But it’s impossible to resist the David-beats-Goliath news of a bunch of amateur investors banding together on Reddit in to execute a classic short squeeze to nearly bankrupt a multibillion-dollar hedge fund. It’s a shame that Tom Wolfe is no longer alive to enjoy the near-universal schadenfreude from watching modern-day day master of the universes squeal.
Like any good story, the GameStop GME, -30.77% saga includes a number of equally fascinating subplots: whether powerful financiers forced the now ironically-named Robinhood brokerage to stop the trading that was empowering the proletariat’s attack on the bourgeoisie; whether the outcome will mean that the New York Mets will have to forgo new free agents; or whether price discovery is usefully improved by website moderators who voluntarily choose to call themselves Chainsaw Vasectomy.
But when the laughter subsides, a few serious policy questions emerge. And none of them are more important than the question of whether GameStop’s stock surge will open the door to malicious domestic and international actors trying to manipulate markets and destabilize the global financial system.
In the run-up to the 2016 election, Russian operatives demonstrated how easy it was for a determined malign geopolitical force to use social media manipulate American voters at scale; it is only a matter of time before a malign financial actor employs similar techniques to manipulate American investors at scale. Just imagine what the Russians, Chinese and Iranians are thinking watching what’s happening with GameStop over the last week. A road map has just been laid out for the intentional mass manipulation of stock prices through targeted disinformation on social media.
It’s not just countries we need to worry about; it’s also rogue non-state actors engaging in cyber financial crimes.
The crazy valuations we saw last week risk are providing a convenient “how to” manual to criminals on the use of social media to rig prices. Such criminals are playing on fertile ground, softened by a decade of central bank liquidity, enormous fiscal stimulus, widespread access to sophisticated trading techniques, and woefully inadequate regulation. Unfortunately, Reddit’s anonymity makes it a tempting tool for those who might want to fuel illicit activity.
Imagine how troll farms, typically deployed to exacerbate political tensions in the U.S., could easily be redirected to hype a particular stock on social media. With the added layer of “class warfare” being ascribed to the GameStop situation, our adversaries can get a two-for-one shot.
“ The SEC has been relatively slow to understand the implications of social media juicing or suppressing stocks. ”
To be clear, as long as arguments about stock trading are factual and based on public information, there’s nothing illegal either about professional investors “talking their book” or about amateur investors discussing and coordinating trading strategies using social media. And we are not alleging anything improper – much less illegal – happened in this case.
The final story on the specifics of “GameStopGate” will come after the conclusion of the class-action lawsuits that were recently filed against Robinhood, the Securities and Exchange Commission review of what has been called a “crowdsourced pump-and-dump scheme,” and the seemingly inevitable Congressional hearings that have already been called for on a bipartisan basis.
But from everything that is publicly available thus far, it seems like this story was more about a clever investment turning into a market bubble rather than about a market manipulation.
Read: Lawsuits see conspiracy in Robinhood’s GameStop moves, but experts doubt narrative
That won’t be the case next time.
Bubbles are a big worry for anyone concerned with financial stability, but market manipulation is a crime. Regrettably, the SEC has been relatively slow to understand the implications of social media juicing or suppressing stocks.
Social media has been around since the 1990s and took off over a decade and half ago. But it wasn’t until 2015 that the SEC issued an investor bulletin flagging the likelihood of false information being laundered through social media to juice or depress individual stocks and highlighted the two enforcement actions it had taken over the preceding five years.
Since then, SEC enforcement leaders have noted social media’s role in fraudulent microcap schemes and brought some cases with a connection to social media, particularly on digital assets. But even these actions have slowed in recent years.
The problem for the SEC is about line drawing. Although regulators routinely monitor Reddit threads for manipulation, proving malicious intent has proven to be nearly impossible. But it would be naive to think the same collective forces spurred on by a chance to take down a hedge fund are immune from sophisticated disinformation campaigns sponsored by a deep-pocketed investor or an enemy state.
Incoming SEC chair Gary Gensler may be the right person to tackle the problem. As the chair of the Commodity Futures Trading Commission, he watched swap trades like a hawk and routinely flagged the potential for new financial products to destabilize the market. But swap trades are nothing compared to the current bitcoin, SPACs, dark money “balance sheet” support to short sellers, and now Reddit-fueled bubbles all inflating at once.
“ The national security community should prioritize protecting our financial markets from disinformation the same way it focuses on protection our elections. ”
Instead of trying to put the genie back in the bottle, perhaps it’s time to adapt to the new reality: Individual investors are here to stay.
While new users should be welcomed, the social media platforms and apps that enable the investing surge must be better integrated into our financial regulatory systems. The SEC also should keep a closer eye on companies like Robinhood and limit the ability of foreign-owned companies to mimic Robinhood’s business model in the U.S. The relationship between these technology companies and their funders has to be more transparent, as Robinhood’s decision to temporarily halt trading in GameStop demonstrated clearly.
Finally, the national security community should prioritize protecting our financial markets from disinformation the same way it focuses on protection our elections. Russia’s social media campaigns designed to destabilize American society came after years of careful observation of the incentives created on social media, and have since been copied by malevolent actors both at home and abroad. In the days since the GameStopGate story broke, it has been leveraged by extremists to radicalize and recruit over encrypted digital communication platforms. The main angle so far is inflaming anti-Semitic conspiracy theories about the financial world.
Just think what the Kremlin learned this week about the opportunities to use similar techniques to undermine both democracy and democratic capitalism — and to potentially make a fortune in the process.
Protecting America against this threat should be a priority for the U.S. government, for Wall Street and for Silicon Valley. All three both bear responsibility for the problems and are also a key part of the solution. As Reddit CEO Steve Huffman put it when asked about the risk that social media forums pose for financial stability last week, “this is a question for the decade.”
It’s time to stop laughing and start answering it.
Josh Lipsky is the director of the Atlantic Council’s GeoEconomics Center and William Wechsler is a senior fellow with the Atlantic Council.
More on the GameStop frenzy:
GameStop short squeeze fuels new stock-market services tracking Reddit messages
Wall Street looks for ways to avoid stampede of Reddit day traders as a ‘force to be reckoned with’
How the Reddit-fueled options frenzy could price itself out of existence
Opinion: GameStop’s stock surge and QAnon couldn’t seem more different — yet they have this trait in common