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GameStop hearing: how trillions flowed to a 'high-stakes poker game'

Cornell University
16-Feb-2021 12:15 PM EST, by Cornell University

On Thursday, the House Financial Services Committee will host a hearing to discuss the recent GameStop stock speculation. The committee will hear from the CEO of Robinhood and other financial service apps that contributed to pushing the stock price of the gaming retailer to record highs. 

Scott Yonker, associate professor of finance at Cornell University’s SC Johnson College of Business, says the hearing is unlikely to shed light on how coordinated trading activity impacts markets and ‘true’ prices. 

Yonker says: 

“It is unclear what the House Financial Services Committee is hoping to learn from its ‘Game Stopped?’ hearing at noon on Thursday. If Chairman Waters’ January statement is any indication, then we can expect a hearing that condemns the hedge fund industry, but does little to help us to understand how the use of social media to coordinate trading activity will likely impact U.S. financial markets or investor welfare. 

In a paper published in the Journal of Finance, my coauthors and I show that professional managers share their information-based trades with their neighbors. We argue that this is good for markets, because information-based trading pushes prices to their ‘true’ prices, helping capital to be allocated more efficiently across the economy. 

“In contrast, coordinated trading based on noise, or some vendetta, will push prices away from their ‘true’ prices, causing too much capital to flow into companies like GameStop and not enough into small pharmaceutical companies—that may be working on the next COVID vaccine.”

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Robert Hockett, professor of organizational, financial, and monetary law at Cornell’s Law School, says the GameStock speculation highlights the inefficiency of the market in directing dollars to ‘constructive production.’ 

Hockett says:

“Several important questions will be raised at this Thursday’s GameStop hearings, but the most important question, alas, is unlikely to come up. 

“The questions that will come up include, among others, (a) whether short-selling should be more tightly regulated, (b) whether large, wholesale hedge funds are hiding behind self-styled ‘retail’ investors, and (c) whether putatively neutral platforms like Robinhood actually have non-impartial ‘skin in the game,’ and must accordingly be carefully regulated under Title VIII of Dodd-Frank—the still oddly ignored ‘market utilities’ portion of that Act.

“As important as these questions are, another one dwarfs them in significance: namely, why trillions of dollars flow, not to high-wage productive industry and critical domestic infrastructures, but instead to mere high-stakes poker games. Yet I doubt that this question will be raised. Until it is, we as a nation will continue to channel far too little money to constructive production and far too much money to destructive speculation.”

  

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