Wall Street Chaos and the Financial Transaction Tax We Need
By Zach Brown
On February 18, in a lengthy House Financial Services Committee hearing titled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide,” the recent events regarding the unexpected frenzy of stock trading of GameStop shares (GME), received some much-needed Congressional oversight, not only showing what went wrong during the GME debacle, but making a clear case for the financial transaction tax that could provide some level of sanity to our frenzied market. Given the complexity of the situation, the witness list included the myriad of actors involved in the GME mania: including players like RobinHood CEO Vlad Tenev, financial trading firm Citadel CEO Kenneth C. Griffin, social media company Reddit CEO Steve Huffman, and popular member Keith Gill aka Roaring Kitty of the WallStreetBets Reddit community (who, rest assured, is not a cat).
Let’s start with a brief background on the situation that had so many of us glued to our computer monitors for this blockbuster virtual hearing. WallStreetBets, a reddit community of investors who discuss stock market trading on the internet, discovered that GameStop’s stock was heavily “shorted.” Without diving too deep into the weeds, short selling is when an investor “borrows” a stock and sells it off to the open stock market, fervently hoping to buy it back for a much cheaper price when the stock’s value drops (and if you’re reading this and thinking that that financial actors betting on the failure of a company in order to make a profit sounds a little casino-esque—you’re definitely not alone). And since these stocks are borrowed, short sellers still must buy the stocks back, even if the price has actually risen. Which brings us to the recent stock market chaos, as these GME short sellers were forced to buy their GME stocks back— a stock valuated at less than $20 at the start of the year that soon rose over 1000% to nearly $350 on January 27. But that’s not all: just as hedge funds were experiencing the financial ramifications from the “short squeeze,” Robinhood suspiciously imposed limits on the trading of GME stocks for its users.
Therefore, a large focus of the hearing was centered on Mr. Tenev, who was brought to task for a multitude of issues, including Robinhood’s freezing of the trading of GameStop stocks for its users and inquiries into whether or not the limits imposed by Robinhood were in cooperation with any of the many short sellers being financially affected by the short squeeze, an assertion he denied. Additional Robinhood-related issues were also raised for example by Congresswoman Alexandria Ocasio-Cortez who championed for the protection of Robinhood’s customers, drawing attention to Robinhood’s revenue sources from “payment for order flow” arrangements with market players like Citadel and pressing Tenev to commit to share earnings from these agreements directly with its customers. Congressman Sean Casten even played a 12-second clip of a company helpline to show that Robinhood’s customer service during the GameStop-related event was severely lacking (I’m no customer service expert, but I’m pretty sure hanging up on your customers isn’t a good look).
<blockquote class=”twitter-tweet”><p lang=”en” dir=”ltr”>In case you missed it, here's <a href=”https://twitter.com/AOC?ref_src=twsrc%5Etfw”>@AOC</a> grilling the CEO of Robinhood. <a href=”https://t.co/BAgYXBRk7t”>pic.twitter.com/BAgYXBRk7t</a></p>— Public Citizen (@Public_Citizen) <a href=”https://twitter.com/Public_Citizen/status/1362535897611206657?ref_src=twsrc%5Etfw”>February 18, 2021</a></blockquote> <script async src=”https://platform.twitter.com/widgets.js” charset=”utf-8″></script>
And while there is still much more to be investigated, one clear problem must be grappled with by our legislators and enforcement agencies: the market volatility and chaos observed around GameStop and other meme investing was not by mistake, but are predictable features of a capital markets system with insufficient regulation and safeguards. More must be done.
For example, at least some of the hedge funds and financial firms that provide revenue to Robinhood through payment for order flow agreements are high-frequency traders , outfits that utilize complex computer programs and algorithms to detect market changes and trade much faster than average investors—increasing costs and exacerbating volatility. These high-speed trading programs not only hurt the stability of markets, but also effectively rig the system against both small and very large investors. These high-speed traders not only have the capability to buy ahead of the average investor, resulting in everyday investors paying higher prices, but also have the capability to sell much faster than everyday investors, resulting in lower sales prices. Research has even shown that globally high-frequency trading increases costs for investors by $5 billion dollars .
And how should we address this clear danger to our economy? A financial transaction tax (FTT) would be a great start, not only stemming the amount of high-frequency trading that is in our markets but also raising much needed revenues. Just a 0.1% tax on stocks, bond, and derivative transactions could raise more than $750 billion over the next ten years, not a small sum of money especially considering the mass recovery the nation must undergo due to the COVID-19 pandemic. We at Public Citizen have been a longstanding advocate of the tax, and it was fantastic to see Representative Rashida Tlaib take the fight for the FTT directly to the hearing in a confrontation with Citadel CEO Kenneth C. Griffin. Even better news? The momentum for an FTT has only further increased since the hearing.
<blockquote class=”twitter-tweet”><p lang=”en” dir=”ltr”>.<a href=”https://twitter.com/RashidaTlaib?ref_src=twsrc%5Etfw”>@RashidaTlaib</a> to hedge fund manager: <br><br>The Hong Kong stock market imposes a tax on transactions, but this hasn't stopped the Hong Kong stock market from thriving. So, let's not gaslight the American people. Y'all will be fine with a financial transaction tax. <a href=”https://t.co/N9m52VKHfg”>pic.twitter.com/N9m52VKHfg</a></p>— Public Citizen (@Public_Citizen) <a href=”https://twitter.com/Public_Citizen/status/1362527272498913280?ref_src=twsrc%5Etfw”>February 18, 2021</a></blockquote> <script async src=”https://platform.twitter.com/widgets.js” charset=”utf-8″></script>
And while these events have showed the true casino nature of the stock market as it exists today, should our capital markets really be a game in the first place? Public Citizen will continue to continue to advocate for policies and regulations to preserve the integrity of our capital markets and further push towards an economy that is just, equitable, and fair.