·  Legal News, Analysis, & Commentary


In the Stock Market, Legal Change Can Inject Stability

— August 4, 2021

The ideal market would allow everyone to invest, on their own terms, and legally, using whatever money they wish to risk.

Throughout the start of 2021, influxes of retail traders into the stock markets created forces more associated with institutional investors. One report by USA Today highlights the astonishing impact of retail investors on the fortune of ailing games retailer GameStop, resulting in the rapid decline of one noted hedge fund and the skyrocketing price of the stock. One phenomenon that retail investors had sought to tackle was large-scale short selling, which can have an undue impact on the fortunes of a business. The legal stock market landscape is now stepping in to change laws, and move the market towards a greater period of stability and fairness.

SEC changes

When retail or individual investors first step into the investment game, they often use analytical tools and industry experience to help mentor them through. Various investment opportunities and simple value trading, combined with a few tips here and there and operational nous, can help investors to step up to the next level. The huge weight of institutional investors and the whims that they operate on can damage that level of equality, and the SEC has sought to actively legislate against this after the $GME controversy. According to Gulf News, the SEC is weighing up the reintroduction of an old rule that would restrict levels on short-selling. While this has been derided as an artificial move in some quarters, it helps to reduce the power of institutions to a degree.

Reducing institutional weight

Stock market concept image. Image via Flickr/user:quoteinspector/ (CCA-BY-2.0).

This move, to allow more freedom and agency to smaller sellers, is also reflected in the new direct listing law changes. According to CNBC, these will allow businesses to raise capital from new sources, not just from reselling shares on the stock market. The ultimate impact of this is greater stability. Keen viewers of the stock markets will have seen the volatile one-day drops that DoorDash and Airbnb on the whims of large stock investments. Ultimately, with large investors unable to change the market with the drop of a hat, this will lead to greater stability.

Enhanced disclosure

According to Bloomberg, the most interesting of all the changes rumored to be impacting the stock market is a change in transparency. New rules suggested by retail trader representatives would force a great level of disclosure upon hedge funds and other institutional investors, so that their positions and strategies would be much clearer to the public and low-level traders. This, in turn, could impact the financial and investment habits of government employees and elected representatives. While only in the pipeline, changes as wide-ranging as these in the legal arena of stock investing will have huge impacts and, perhaps, change the market permanently.

For investors of all types, these are exciting and uncertain developments. The ideal market would allow everyone to invest, on their own terms, and legally, using whatever money they wish to risk. These laws are designed to make a new and much more level playing field.

Join the conversation!