Interview with the Southern California Record about congressional letter to the SEC regarding potential anti-competitive market practices and trading restrictions associated with electronic trading platforms like Robinhood (March 17, 2021).
“Trading apps aren’t just neutral onramps into financial markets for small-dollar investors,” said Erin Lockwood, assistant professor of political science at the University of California, Irvine. “Despite marketing themselves as tools of financial inclusion, they’re not providing a public service; they are for-profit companies with their own incentives and their own regulatory obligations, some of which entail, directly or indirectly, imposing limits on what trading activities are allowed.”
The Senate Banking Committee has since confirmed President Biden’s nominee, Gary Gensler to lead the SEC and Lockwood expects the SEC under Gensler to be more actively involved in investigations and regulation.
“It’s tricky because it’s possible that the GameStop situation did not involve any illegal fraud or market manipulation and that there is considerable political appetite for greater regulation nonetheless,” Lockwood told the Southern California Record. “But this would likely entail new forms of rule-making to govern the gamification of trading via electronic trading platforms — and that would raise the possibility of either direct or indirect limitations on users’ trading activity, though these would be public rather than private rules.”
Questions in the letter that Orange County Congresswoman Steel and her colleagues sent to the SEC include the following.
Is it appropriate for financial services institutions to restrict the purchase but not the sale of a particular stock in response to market changes spurred by honest and freely available information?
“Robinhood’s decision to halt trading was driven by their need to meet capital requirements intended to preserve financial stability by offsetting the risks associated with huge position swings in a highly volatile market,” Lockwood said in an interview. “With regard to the appropriateness of platforms like Robinhood restricting trading, the two things to be aware of are the incentives and obligations of for-profit trading platforms and the regulatory distinction between professional and amateur traders.”