CRS Provides Short Overview of Trading in a Meme Stock
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") reviewed the lifecycle of the meme stock Meta Materials ("MMTLP") to give policymakers context for a trading halt placed by FINRA on December 9, 2022.
In a Report, CRS described the popularity of meme stocks in social media, highlighting that "their share prices often decouple from their perceived fundamental financial performance and income capabilities." In the case of MMTLP, CRS said that valuation discussions on social media contributed to the meme stock’s rapid price increase at the end of 2022, despite some research analysts claiming that MMTLP shares during that time were "worthless." FINRA placed a trading halt on MMTLP through its regulatory authority under FINRA Rule 6440(a)(3) ("Trading and Quotation Halt in OTC Equity Securities"), declaring an "extraordinary event." While FINRA placed the trading halt before the cancellation and new share distribution dates to provide a "more orderly transaction settlement," CRS stated that some investors were prevented from exiting their positions as a result.
CRS pointed to the MMTLP event and the resulting losses experienced by investors as an example of the "significant investment risks" associated with meme stock trading of both complex and speculative instruments. CRS outlined several policy concerns regarding meme stock events, including whether:
- investors take on the investment risks with a full understanding of material information and "without misleading guidance from social media";
- there is the potential for increased transparency regarding risk disclosures to "enhance market integrity and reduce market disruptions";
- fraud and manipulation, including illegal forms of naked shorts and counterfeit shares, are present and could distort markets; and
- there are indications of insider trading or pump-and-dump schemes.
Commentary
Before moving ahead with further protections for retail investors, the SEC should go back and do a study of the impact of Regulation Best Interest. Has it resulted in retail investors receiving better advice from broker-dealers or has it forced them to social media? (See, Choose One - Best Interest or Full Service.)
The SEC's new rule proposal that effectively discourages the use of predictive analytics in serving retail investors will make it still more difficult, if adopted, for retail investors to obtain information from registered broker-dealers. Further, ordinary retail investors do not have sufficient savings to make it worthwhile for them to hire an investment adviser, or for an investment adviser to serve their accounts.
So where are retail investors going to go for information? One pretty good guess is social media.