The Interconnectedness of Markets and Reserving Judgment in Light of Recent Trading Events

Acting Chair Allison Herren Lee and Commissioners Peirce, Roisman, and Crenshaw recently released a statement on the recent market volatility. Their statement highlighted the Commission’s essential mission to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”

Recent events serve as a reminder that these functions are interconnected and there are very different and diverse investors that the Commission is tasked with protecting. The Commission should always place retail investors in a priority position when carrying out its mission of protecting investors. However, this approach becomes incredibly difficult when considering the various exposure that retail investors have to the markets.

It also begs the question which of the Commission’s essential missions should be prioritized at any one time. Should the Commission maintain fair, orderly, and efficient markets ahead of protecting investors or vice versa? In most instances, these two goals are entirely compatible.

As an example of the intricacies involved in balancing and prioritizing these missions, consider that many retail investors have an interest in a pension plan sponsored by their employer. These pension plans may have exposure to private investment funds, such as Melvin Capital, or to issuers like Tesla. They might also have exposure to companies like Robinhood Financial or the debt of Citadel LLC. They might rely on Fidelity as a custodian of the plan’s assets or as its broker-dealer. Any decision by one market participant or regulator can have a multitude of consequences on investors or the perceived fairness, order, and efficiency of the markets. It can also jeopardize or instill confidence in capital formation.

Whether the evidence ultimately shows whether any impermissible, coordinated market manipulation occurred in Gamestop stock, the interconnectedness of our financial markets makes it incredibly difficult to judge the Commission’s actions in real time and without any further inspection of its policies and actions in other facets of its mission. Before rushing to judgment on any market participant or regulator’s successes or failures in handling the recent trading issues, we should not forget the difficult balancing act that the Commission manages every day.

Leave a Reply