The brouhaha will eventually die down over WallStreetBets and GameStop but what’s likely to come out in the wash is the precarious position occupied by discount brokers, namely, those who claim to be for the masses while they’re nonetheless allowing regular folks to bet the pot on shitty stocks. It’s a fine line, says Wealthsimple’s Mike Katchen, but somebody’s gotta walk it.
This May 1 will make it 46 years since the US Securities and Exchange Commission took the big leap of allowing brokerage firms to set their own trading fees, and while a pretty straight line can be drawn from that day in 1975 to our current investing landscape populated in part by a slew of discount brokers, the rise in particular of the retail investor has nonetheless been a sight to behold.
The drama will continue at least for a while longer after markets closed on Friday with unlikely champion of the small investor GameStop rocketing up 70 per cent and swiping back ground lost the day before, thus keeping the stock in the bizarro world of being up 1,600 per cent over the last three weeks on little news and a lot of all-caps boosterism.
The Reddit-fuelled mania surrounding stocks like GameStop, AMC and even BlackBerry has been portrayed as classic David v. Goliath, one where retail sticks it to the suits by making them eat their shorts. Pointedly, the resonances are not lost on many when it comes to online trading platform Robinhood, one of the principals here whose ‘rob from the rich’ impression has made it at the same time super popular and, from a wider vantage point, kind of scary.
Feeling the heat this past week, Robinhood initially did what critics wanted by restricting access to certain stocks like GME, AMC and BB, but that was Thursday and by Friday they had made a quick reversal, responding to pressure from followers who said maybe it wasn’t living up to its own principles.
“We stand in support of our customers and the freedom of retail investors to shape their own financial future,” Robinhood said in a blog post. “Democratizing finance has been our guiding star since our earliest days. We will continue to build products that give more people—not fewer—access to our financial system.”
But while many online brokers (TD Ameritrade, Charles Schwab, Webull) followed suit and put up restrictions on trading the stocks in question, the response up North from Toronto-based Wealthsimple has been a clear thanks but no.
“We’ve done a number of things in the last few days to try to get ahead of this, as people are trading on the fear of missing out and on an emotional basis,” said Katchen, Wealthsimple’s co-founder and CEO, speaking on BNN Bloomberg on Friday. “We sent out emails reminding people about the risks associated with speculation. We’ve embedded in-app notifications for people looking at these stocks reminding them that if they do want to trade them there is an enormous amount of risk that they’re taking in this kind of a market environment.”
“Our position as a company, especially in the brokerage market, is where we can’t offer financial advice we want people to arm themselves with the knowledge they need to be successful, to be aware of the risks,” Katchen said.
Like the other platforms, Wealthsimple’s business has taken off during the pandemic. Only a few years out of the gate, the company is the top robo-adviser in Canada, where it recently hit unicorn status, raised a substantial $114 million in financing and boasted $8.4 billion in assets under management. By this past Thursday amid the GameStop madness, Wealthsimple’s platform became the most-downloaded app in Canada, a sign of the times, according to Katchen.
“I think the boom in demand is such a great thing for the industry,” Katchen said. “However, I think we have to walk that fine line of using this opportunity to bring more and more people into the capital markets and into the opportunity of investing and what that can mean for their financial futures but to also remember that investing carries risks, and it does require thoughtfulness and long-term thinking. It’s a remarkable and unprecedented period.”
What will happen to all of this once people start going back to spending their extra cash on dinners out, hockey tickets and the Mayan Riviera? Unclear.
Wealthsimple has distinguished itself so far by staying away from some of the bells and whistles used to bring in customers by the likes of Robinhood, and they’ve kept some of the more influential tools like options and margin out of the hands of users, again, so far at least.
Ultimately, though, it’ll be interesting to see what the other team at the table, the securities regulators, have to say about such gestures toward educating the many even as they’re arming them to the teeth.
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