GameStop-Related Market Volatility: Policy Issues

"Video game chain GameStop triggered a market frenzy in early 2021 when its stock price rapidly increased from around $18 to well over $400 in intraday trading (Figure 1). The developments soon spread to some other stocks and markets. The episode raises several policy issues, including social media’s influence over investment decisions, zero-commission trading, short selling, investor protection, market functionality, and financial stability...
Figure 1.
GameStop Stock Performance During the Week of January 25
Source: FactSet and CNBC.

Policy Issues

Multiple issues surfaced during the GameStop-led market volatility that could influence policymaking.

Social Media Influence

Some observers view the GameStop-related market volatility as a form of social rebellion carried out through capital markets and amplified by social media. Specifically, some traders on the WallStreetBets message board expressed a desire to target hedge funds that had bet against GameStop’sstock. Accordingly, some of the interest in GameStop appears to have been driven by resentment toward financial establishments rather than conventional economic justifications.

Zero-Commission Brokers and the “Gamification” of Trading
 

The GameStop phenomenon has also cast a spotlight on recent moves to zero-commission trading by retail brokerage firms. Robinhood, for example, is a zero-commission online and app-based broker serving more than 13 million mostly young retail investors. The zero-trading-fee business model provides convenience for investors to participate in savings and investments. It also draws criticisms due to concerns that the “gamification” of the trading experience—the use of design elements often found in online games—may give rise to impulsive decisions.
 
Retail investors’ participation in trading reportedly increased from around 10% to 25% in the first half of 2020 as the Coronavirus Disease 2019 pandemic took hold. Retail investor groups—fueled by social media messages and equipped with new and convenient tools such as Robinhood—could alter market functions and change the normal course of company and investor activities.."
GameStop