The GameStop stock trading episode that began in January 2021 has been unprecedented in some ways, especially in the ability of market participants to organize collective action openly yet anonymously. In other ways, it’s been an unsurprising repetition of past experience. Financial markets are imperfect, display many frictions, and the imperfect alignment of interests in financial markets is a perpetual dilemma in designing both contracts and public policy.
The GameStop episode goes to the heart of many regulatory issues in finance. It provoked a flurry of reactions from politicians and regulators, including statements of concern, proposals for new laws and regulations, and investigations of potential wrongdoing, all suffused with expressions of hostility directed at “market manipulation” and speculators, characterizing the financial markets as a “rigged game” or “casino.”
Contrary to the cliché of an unregulated and predatory financial system, the actions of the participants and the events themselves shine a light on a remarkably dense array of regulations already in place. But much of today’s regulation makes markets function worse, not better, for investors. Much of the reactive call for investigations into wrongdoing and additional regulation was noteworthy for its vagueness. And much of the uproar has reflected a long-standing combination of paternalism, bad advice, and confidence in experts that misleads investors. The GameStop episode has also been just one manifestation among many of financial market buoyancy sustained by low interest rates.
