The Cause and Effect of Market Manipulation

The Cause and Effect of Market Manipulation

June 10, 2021

Since their inception, the financial markets have grown increasingly efficient due to advancements in technology, progressions in information flow, and increased investor sophistication. Anomalies and other inefficiencies in the market have been brought into the light, providing consistency to valuations for all investors. This has proven beneficial for our economy as consumers can confidently invest in companies based on fundamentals.

 However, as of late we have seen tremendous volatility and abnormal spikes among many different securities. Much of this is due to the role of social media and algorithm trading (usually acting in concert). GameStops stock quote went from below $40 to almost $350 in a week due to investors acting in synchronicity through social media sites like Reddit Wallstreetbets.  Tweets from popular social media icons like Elon Musk wildly swing the crypto markets from day to day. Furthermore, AMC has now grown over 2,000% YTD and is so overpriced it is almost laughable (again driven by the Reddit community trying to stick it to hedge funds and make a little, or a lot, of money on the side).

 A market once founded on financial fundamentals is now being manipulated by non-foundational demand. Many amateur investors have begun trading by simply throwing their money at whatever is hot, driving prices up for no reason other than demand for a ticker. Such dramatic mispricing of securities is a poor use of American capital.

 With the Federal government pumping money into the economy, “free” trading sites popping up every day, and social media following the next sure thing - perhaps we should expect to see these types of repercussions. The bigger question is:  How will congress and the SEC respond?  Will this new era of trading result in a costly evolution of the financial markets?  Only time will tell, but the longer they wait to take action the greater the risk of long-term structural financial damage to our economy.