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However, attempts to shut down discount brokerages or online forums that are part of the latest market phenomenon are fraught due to concerns over restricting trading in already volatile markets and curtailing freedom of expression.
“Any country that embraces free speech cannot have its securities regulator restricting the right of expression,” said Jacob Frenkel, a former senior enforcement lawyer at the U.S. Securities and Exchange Commission now in private practice in Washington, D.C.
“Nevertheless,” he said, “the use of social media for fraudulent purposes, that is to manipulate stocks, or to circumvent strict disclosure and investor communications rules, should be enforced strictly.”
Staley, the Bennett Jones lawyer, urged regulators to be cautious, particularly because the phenomenon could turn out to be “a herd effect and not manipulation or misrepresentation by people seeking to make a buck.”
He warned that “ad hoc solutions may cause more harm than they solve” in terms of systemic risk.
“This (phenomenon) is in considerable measure a reaction to large short positions, where people can make money squeezing the shorts if enough people jump in,” Staley said. “There’s no easy solution, especially as shorting serves a valuable commercial purpose.”
I am most worried about people using options and margin when they don’t understand it
Maureen Jensen, former chair of the Ontario Securities Commission
Jensen said her view is that neither investors nor the trading platforms appear to be doing anything illegal or wrong.
“But they are taking large risks, some of (them) don’t understand that they are,” the former regulator said.
