Blocking Access To Trades In GameStop, AMC, And Other Favorites Of The Shorts Is Unethical And Hypocritical
Seeking Alpha Analyst Since 2015
Summary
- Investors have the right to purchase stock in any company for any reason - no one should have the right to block that freedom.
- While trading off WallStreetBets recommendations is not something I do, it's actually a valid investment strategy, albeit with significant risks.
- The suggested manipulation from WallStreetBets posters is no greater than what we see from some short sellers and even Wall Street bankers.
I've never written an article on Seeking Alpha before, nor any public investment forum. I'm a long-term fundamental investor who does deep-dive research and analysis into every company I buy. I was a mutual fund manager for almost two decades and I now invest with the same intensity, but personally. Some of you have seen the depth of my research in the commentary I share on other people's research reports. Basically, I want to know the companies I invest in extremely well so I'm comfortable enough in my positions to buy the dips where appropriate and sell when fundamentals or price dictate that action.In other words, I'm far from a speculative WallStreetBets trader and have no dog in this race.
That said, I've found myself very troubled as various trading platforms have made the decision to restrict individuals from trading in the stocks promoted on WallStreetBets. You know the names - GameStop (GME), AMC (AMC), Bed Bath & Beyond (BBBY), BlackBerry (BB) and others.
So why are the restrictions in place?
Are the restrictions in place to protect these traders from the inevitable sharp drop in the price of these stocks?
That may be the logic, but it's not ethical. Investors have always had the right to invest in any company for any reason. No broker restricted the purchase of internet stocks in 1999-2000, despite the fact that it was clear some of these companies had no rational business model. But why would they be the judge of that anyway?! People lost a ton of money during those heady days. And, at some point, many people will lose a lot of money on the WallStreetBets stocks. None are worth anything near where they're trading now. Of course, that's just my opinion and I shouldn't be allowed to impose it on others, nor should anyone else. And maybe I'm wrong! Maybe there's a value in these companies none of us "smart investors" see! (I doubt it, and that's not what most buyers think anyway, but it could be true.) Further, I think most buyers in these stocks know there's a significant risk, they may see it in the day-to-day price gyrations, and frankly, it's a risk we all take in any investment. Sometimes "regular" stocks "blow up" on bad earnings, the loss of a key customer, demand declines, etc. So who has the right to tell us which companies we're allowed to invest in and which we can't? Why is that freedom allowed to be restricted? Why are WallStreetBets traders any more restricted than I am in my fundamental research long-term investing?
Are the restrictions in place because there's a sense of market manipulation?
OK, I'm no lawyer. Let's make that clear right out of the box. In my decades of market participation, I have seen pump and dump manipulators and I have seen others use their public positions to manipulate stocks (Dan Dorfman of CNBC and Money Magazine in the 90's always comes to mind). Bottom line: there will always be scammy manipulators.
But is that happening here? Is the promotion of stocks on WallStreetBets market manipulation?Again, I'm no lawyer, but how can it be any more so than short reports or Wall Street research reports? WallStreetBets is a forum for anyone to share their investment ideas. And frankly, despite what many want to believe (and my initial gut reaction), the investment thesis being shared is actually legit! Now, it's not something I would follow. I consider it as trading to just "play chicken" with the shorts. It's a strategy that will cause big losses for those holding the bag when the music stops. But squeezing the shorts is still a legit investment strategy as much as any other. Look, we're all in the market to make profits - longs, shorts, day traders, etc. There are always winners and losers. And everyone has a different strategy - fundamentalists, quants, chartists, event investors, activists, etc. And yes, squeezing shorts is something even professional investors do! We've seen it in the headlines at times - a great battle between big investors on both the short and long sides - but it happens much, much more often behind the scenes. Professionals know when the stocks they like have a big short position and frankly it's seen as a positive because they'll have to cover at some point (i.e. pent-up buying demand). If the buyers are about to make a big investment, all the better. Squeeze the shorts! In fact, in my old life, when we had a significant position in a stock with a large base of shorts, there were times we'd restrict the brokers from lending our stock, forcing some shorts to buy and cover their positions. Squeeze the shorts. It's as legit as anything on Wall Street.
The only thing different this time is that it's individuals playing the short squeeze game.
But let's get back to the issue of market manipulation. If this is market manipulation than how is it any different from what many short-sellers do and, in fact, what Wall Street analysts do?!
If a short-seller establishes a position and then writes a negative report, they justify it as sharing valuable information with the market. But why do this if not to manipulate the price of the stock by getting other investors to sell? It would seem to technically be manipulation. WallStreetBets traders are doing nothing different than the shorts. They're sharing their own "analysis" and "research" with the market in the hopes of making money by getting other investors to buy the stocks they own. No difference. Well, one makes professionals money, the other makes individuals money. There's your difference.But let's take this further! Wall Street analysts publish research reports on companies for their clients to use in making investment decisions. We've all seen the statistics. These reports are significantly biased to the bullish side. Last I saw, about 70+% or more of Wall Street research had a Buy recommendation and roughly 1% of so had a Sell.
So let's think about how Wall Street firms make money. One, they make money on our trades. But two, they make substantial money on deals - IPOs, secondaries, mergers & acquisitions, etc. The deals come when companies need to raise money. These companies choose their own underwriters (i.e. Wall Street banks), who take UP TO 7% of the amount raised. Everyone knows companies raising money are going to "reward" those Wall Street firms that have treated them well by writing positive research reports and promoting their stocks to large institutional clients. It's very well known "on the inside" that this is the rationale behind much of Wall Street's "research" - keep the public (and soon-to-be public) companies happy and hope to be chosen for the next big pay day. Therefore, if Wall Street research demonstrates a significant and unnatural bias toward Buy recommendations and those Buy recommendations help Wall Street firms get corporate finance business, can't that really be considered market manipulation for their own gain?! They're recommending that investors buy certain stocks based on their desire to gain corporate finance business. In fact, I'll go one further and say that this is almost GREATER market manipulation than what WallStreetBets is being charged with by some. Wall Street "analysts" and their firms have no direct financial interest in you or I making money on their recommendations and have no downside in the game. They can benefit tremendously from influencing our trading decisions, but cannot lose money from their recommendations. That's always been the problem with the "sell side" and why they're useless to smart "buy side" investors. It also reeks of self-serving manipulation.So, basically, what trading platforms are doing by restricting individuals from trading in certain stocks is saying "we're okay with manipulation from professionals, but not from individuals."
Peeling the onion even further, I could make the case that shorting stocks at all is just as "immoral" as squeezing shorts. Stocks represent tiny slices of a company. When you buy a stock, you're buying a piece of a company. Therefore, at a base level, what is shorting? Yes, it's a bet that a stock price will decline, but is it logical that someone can buy a "negative interest" in a company? That makes no sense. Frankly, the more I think about it, it's as much financial engineering as any of the "sophisticated instruments" Wall Street has come up with to allow people to bet on anything. Ah, the days of the Lehman Brothers collapse thanks to this sophistication and the significant risk that caused for the entire global financial system. But that's another story.
The bottom line? If the market allows shorting, if the market allows public research to be shared by those with a vested interest, if the market doesn't vet the rationale of every investor on every stock they buy or sell, then as much as they feel they're protecting the public, they're actually doing the opposite. THEY are now the ones manipulating the market by restricting individuals from buying shares of any company them wish for any reason, making the decision for the individuals regarding how much risk they're allowed to take. Meanwhile, professionals, including short sellers can continue trading as they please. Next will come restricting any purchasing of biotech companies since many of those are "all or nothing" plays on a single drug candidate. Maybe casinos should be restricted from letting me bet on a single roulette number? It's a long-short bet with a high likelihood of me losing all my money, but it's my choice to make.
This has hit the mainstream and the government. We'll see how that plays out. In the meantime, maybe it's time for the WallStreetBets "movement" to move permanently to other platforms that respect each investor's right to buy and sell stocks as they please, regardless of any perceived "insanity" or tremendous risk.
Let's discuss. I'd love to hear your opinion - with me or against me.
@SmallCapKing
On Twitter, @SmallCapKing2 (don't forget the '2')
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