7 ways in which the government could modernize the stock market rules

The creation of stock market rules often comes after a major event occurs. Some examples include the stock market crash of 1929 – which led to extensive federal securities legislation – and the financial crisis of 2009.

For the most part, regulators are reactive – there is usually not much effort to predict what the next crisis may be. And this can certainly lead to risks in the financial system. This is especially the case due to the rapid advances in technology.

As for this year, the financial markets are dealing with yet another emerging phenomenon – that is, the Reddit forum traders. They have become a great force with driving stock that GameStop (NYSE:GME) and AMC (NYSE:AMC) to dizzying heights. Even silver has been caught in the frenzy!

Congress has already held hearings on the matter and Finance Minister Janet Yellen has called for a meeting with federal regulators. There are even buzzes of possible criminal investigations into alleged market manipulation.

So what are some possible measures for new stock market rules? Well, let’s take a look at seven:

  • Gamification of Investing
  • Order flow
  • Information about brokers
  • Card sales requirements
  • Information on short sales
  • Solution
  • Taxes

Let us now dive in and take a closer look at each one.

Stock Market Rules: Gamification of Investing

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Founded in 2013 in Silicon Valley, Robin Hood is one of the most valuable fintech companies in the world. This online brokerage firm has over 13 million investors.

But there are concerns about how its app is structured. For example, there are gamification features that make it very engaging. It’s like taking the addiction of something like Tinder or Snap (NYSE:SNAP) to invest.

The problem? This can lead to very risky activities. The reality is that many investors do not have the time or expertise to be successful day traders.

Keep in mind that the Massachusetts Securities Division has brought an action against Robinhood for its gambling efforts. And this can only be the beginning of government intervention, especially if extreme volatility continues.

Order flow

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One of Robinhood’s disruptive strategies was to have zero commissions. This enabled strong growth in the user base.

But of course, the company must find ways to generate revenue! For this purpose, the company has relied on being paid by market makers for “order flow”. While this is a legitimate practice, there is a fear that it may be abused. For example, a brokerage firm may ultimately provide better prices for larger clients at the expense of private individuals.

The topic of order flow is unlikely to disappear. It seems that this is an area where stock market rules can provide better transparency.

Stock Market Rules: Brokerage Disclosures

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A major complaint with brokerage firms during the Reddit increase was the lack of disclosure. It seemed somewhat arbitrary when they would put restrictions on which shares to buy and sell. As a result, there have been a variety of lawsuits from customers.

Now the brokerage firms were really under a lot of pressure. With the huge volumes, Robinhood must quickly raise $ 3 billion to stabilize its balance sheet.

“Without a doubt, more transparency and better communication from brokerage firms will help all investors and in many ways would create a level playing field for retail investors,” said Clemens Kownatzki, PhD student and professor of finance at Pepperdine Graziadio Business School. “Institutional investors have an information advantage and often have direct channels to brokerage firms. If you are in the camp for market-efficient enthusiasts, you can look at market prices as an information system. Because some marketers offer payment flow from brokerage firms, they have the ultimate information flow and can monitor all retail investors, even some of the more long-term institutional fund managers. ”

Card sales requirements

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Card sales have suddenly become a hot topic with the Reddit trading spectacle. Yes, this group has targeted companies with high levels of short positions. The idea is that – when stock prices rise – this would encourage short sellers to close their positions by buying back shares.

But what was very interesting is that some companies had short positions in addition to the floats (this was the case with GameStop). In other words, this probably overcharged the short press.

It is true that it is good for those who are bullish. But then it also does not seem like a good idea for the financial system to have technical shortcomings. So one idea is to look at ways to reduce companies’ excessive short circuits.

Stock market rules: Information on short sales

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No doubt, on InvestorPlace.com, Yahoo! Finance or CNBC, there is easy access to tickers for stocks and immediate prices. But what if you want to find similar information about stocks that are short-circuited?

There is not much of a system for this. Transactions are usually handled with brokerage firms and mutual funds. The market is actually quite lucrative as there are relatively high interest rates for borrowing securities.

Still, there should be no transparency with this? Isn’t it a good idea for investors to get a feel for the flow of short selling?

This seems really reasonable. The irony is that the Securities and Exchange Commission was after the financial crisis intended to provide a system with more disclosures. But this was never done.

Solution

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A critical part of the stock market’s infrastructure is clearing. This enables orderly payments for securities and change of ownership.

Note that the system works on a “T + 2” deal. This means that a transaction is not completed until two working days.

Even if the markets are volatile, this can entail great risks for financial companies. They do not want to be able to put up large amounts of capital to support the deal.

Because of this, there are calls to get “T + 1” or even real-time billing. Granted, this will not be cheap due to the need to manage older IT systems. But such a modernization is likely to be crucial for markets with better results.

Stock market rules: Taxes

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With the markets in the bull phase, it is no surprise that measures have been taken to introduce new taxes. The Covid-19 pandemic has also led to major deficits with state and local budgets.

A group of Democratic congressmen has proposed a wealth tax. This will mean taxation of profits even if no sales have taken place. And the goal is to raise $ 10.2 billion.

However, the introduction of such a law is not too likely. After all, the New York Stock Exchange has already indicated that it would relocate if this legislation is implemented!

At the time of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investment and technology, including The basics of artificial intelligence, High-performance IPO strategies and All about Short Selling. He is also the author of courses on topics such as Python language and COBOL.