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Retail investors’ risky trading likely to continue and lead to big losses in the future

22 February 2021 Momentum Securities

The Department of Justice and Securities and Exchange Commission (SEC) in the US have both officially launched investigations into the GameStop surge.

While the dust has seemed to have settled, this may not be the last time something like this will happen and it should become clear that retail investors are increasingly exposing themselves to unnecessary risks.

This is according to Evan Giannakis, Head of derivatives at Momentum Securities, who points out that the surge that the market witnessed as a result of the rallying of retail investors, is an event that was bound to happen sooner or later. “There are many stocks out there that (like GameStop) have short interest that exceeded 100% of their available shares because of the off-market position being taken by some of the players in the industry. With that said, retail investors stand to lose a lot of money if they do not ensure that they operate through a reputable investment broker.”

Taking a step back, he explains that the events around the GameStop surge should demonstrate the risk around rapidly climbing stock prices. “This is likely not the last time that we will see something like this, which is why it is important that investors take note of what happened here.”

To start, Giannakis says that while retail investing brokers likely had no hand in manipulating the market trend, these companies were still on the receiving end of the debacle. “When the stock price climbed as quickly as it did, the risk that platforms such as Robinhood could not fulfill their part of the deal and may default on payments to investors, grew exponentially. Eventually these platforms did not have enough capital to cover their risks, which is why they were ultimately stopped from buying more stock and investors were only able to sell.”

He however adds that, if it had been allowed to continue, investors may have suffered major losses.

As Giannakis explains, this not only relates to company stocks but also to investments like cryptocurrencies. “Bitcoin, for instance, is not currently a regulated instrument. Quite a few established institutions, such as the SEC have warned that many investors stand to lose a substantial amount of money as a result of not investing with trustworthy parties. It should be understood that these warnings are serious, and even though they cannot stop people from investing where they see fit, these regulators can still make investors aware of the warning signs. ”

In light of this, Giannakis does have some advice that South African investors can take from this case study. “Do your homework about who your counterparty risk lies with. It is vitally important that when you talk to your broker, they should be able to tell you who your counterparty risk lies with for the instrument that you are buying. Also, it is crucial to make sure that the market you are investing in, is a regulated market. When you see high volatility (like a stock that undergoes a 10% change in share price each day) it is very possibly unregulated and is at risk of losing a lot of value quite suddenly.”

With that said, he believes that the SEC will have its work cut out to conclusively make a case for share price manipulation. “I believe that at best, this will lead to some tighter regulations being introduced in the US market.”

Momentum Securities believes in assisting clients with derivative strategies in their partially managed portfolios. “Our advice to clients is to first and foremost fully understand the associated risks when trading in derivative instruments. It is important to have a clear understanding on what you’re trying to achieve. Determine what your end goal is with when it comes to all your listed investment decisions and if you are uncertain speak to an adviser who will guide you through the investment process and help you make an informed decision,” concludes Giannakis.

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