Regulators should avoid dampening animal spirits while policing social media platforms
MAS, SGX RegCo should go after bad actors spreading misinformation, not retail investors talking up their own stocks.
The Monetary Authority of Singapore (MAS) and Singapore Exchange Regulation (SGX RegCo) are getting nervous about all the excitement generated by the GameStop short squeeze last month.
On Feb 2, the two regulatory bodies advised investors to be on heightened alert to "the risks related to trading in securities incited by online discussion forums and social media chat groups".
MAS and SGX RegCo went on to warn investors not to infringe the Securities and Futures Act (SFA) by, say, making or disseminating false or misleading statements; fraudulently inducing others to deal in securities; or employing manipulative and deceptive devices.
The regulators added that they are monitoring market activities for signs of false trading or other forms of misconduct.
"Restrictions may be placed on the trading accounts of those suspected of such misconduct and the relevant securities may be placed under designation or suspension," they said.
"MAS and SGX RegCo are working closely with SGX member firms to ensure our market remains orderly."
Retail investors have emerged as a powerful force in markets around the world over the past year, and have been the cause of enormous but short-lived price gains in a number of stocks.
In the United States, for instance, shares in bankrupt car rental firm Hertz and struggling department store JC Penney rocketed in June last year, reportedly due to indiscriminate buying by retail investors.
The huge spike in GameStop's share price last month marked an interesting new chapter in this story.
In this instance, retail investors organised themselves through social media - specifically a Reddit group called WallStreetBets - to squeeze out short sellers of GameStop's shares.
As it happened, they not only succeeded but also caused a couple of hedge funds that were on the short side of the trade to lose billions of dollars.
Retail investors have now become aware of their collective power, and their confidence is infectious. Immediately after the GameStop short squeeze, the WallStreetBets subreddit was plastered with meme after meme hinting at the power of retail investors over hedge funds.
Scrolling through them gave me a sense of how terrorists become self-radicalised.
Since then, we have seen subreddits inspired by WallStreetBets emerge in other markets.
There is now a BursaBets subreddit focused on Malaysian stocks, which seemed to spur a fillip of trading interest in beaten-up rubber glove stocks.
There is also an SGXBets subreddit, dedicated to the Singapore market, where support for seafood supplier Oceanus Group was recently expressed as its share price climbed.
Should market regulators concern themselves with what is said about stocks on social media? What harm can come from letting retail investors have some fun in the market?
Can MAS and SGX RegCo effectively regulate what happens on social media anyway?
First of all, let me just say that retail investors ought to heed the advice of MAS and SGX RegCo. Chasing stocks that have been pumped up by speculative trading activity will not serve them well over the long term.
Retail investors also should not assume that everyone contributing information and views to a Reddit group is acting in good faith. Any social media channel that has influence in the market will naturally draw participation from all manner of players.
It seems unlikely to me that small investors were entirely responsible for the short squeeze on GameStop. It is possible that professional investors, including some hedge funds, joined in the push.
That would partly explain why GameStop has since pulled back some 80 per cent from its recent closing peak, despite participants in the WallStreetBets group urging one another to "hold the line".
By the same token, regulators should not just worry about "certain individuals" among retail investors using social media platforms for their own ends. Regulators should also ensure that these platforms do not become a means for very sophisticated bad actors to spread misinformation.
What can regulators actually do to prevent social media channels from being corrupted with false information, and participants in social media groups from breaching the SFA?
Attempting to discover the identity of the individuals behind every ridiculous and obscene handle on Reddit, and then monitoring their trading activities, seems unfeasible to me.
In my view, regulators should avoid being too heavy-handed in this matter.
In December last year, SGX RegCo warned the public that "pump-and-dump" schemes were being perpetrated in Telegram chat groups where investment strategy is discussed.
The way SGX RegCo explained it, these schemes essentially consisted of the wrongdoers accumulating a low-price, low-volume stock and then loudly promoting it, perhaps with the use of more than one account.
When the stock moved up, the wrongdoers unloaded their holdings at a profit.
SGX RegCo was right to warn investors about what it had discovered.
Yet, as pump-and-dump schemes go, these do not seem to be all that egregious. Certainly, they couldn't hold a candle to the spectacular rise and sudden fall of shares in Blumont Group, Asiasons Capital and LionGold Corp back in 2013.
The massive inflation of this trio of penny stocks, alleged to have been masterminded by John Soh, involved fraudulent trading of the securities through dozens of brokerage accounts. The pumped-up penny stocks were also used as collateral for loans.
Are retail investors really doing any harm when they talk up stocks they own? Aren't CEOs doing essentially the same thing when they meet analysts and fund managers and attempt to put the best possible spin on the outlook for their companies?
Perception is reality
For fast-growing companies, investor perception is reality. Without access to capital, many would probably not be able to achieve their ambitions.
Timing is sometimes important. For instance, the dot-com mania in the late 1990s enabled Amazon to go public at a better-than-expected valuation.
In early 2000, Amazon went on to raise more than US$670 million by selling convertible bonds to European investors in a deal that is said to have enabled it to survive the technology bust that year and embark on a new phase of growth.
More recently, the huge availability of venture capital and private equity funding enabled a whole generation of startups - from Alibaba to Uber - to gain enormous scale and valuations before taking their chances in the public markets.
Now, in the age of social media, some companies are learning how to directly cultivate a loyal retail investor following.
Elon Musk, Tesla's founder and CEO, does nothing to hide his disdain for Wall Street analysts, some of whom have been sceptical about the electric vehicle maker's pace of expansion. On earnings calls, Mr Musk has been known to take questions from his legions of sycophantic retail investors before calling on fund managers and analysts.
Those true believers in Tesla have helped get the company to where it is today. Shares in Telsa closed Friday at US$852.23, nearly 10 times the level at which they traded at the beginning of 2020. By some estimates, short sellers of Tesla shares lost more than US$40 billion last year.
MAS and SGX should be careful not to discourage the already limited retail investor participation in the Singapore market.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.