This article first appeared in The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022

Following the rise of retail traders during the pandemic, the US Securities and Exchange Commission (SEC) is overhauling its rules to ensure better dissemination of information and price discovery for the smaller boys.

The sweeping changes are the most profound to the rules of stock trading in the last 20 years. The overall objective is to prevent retail investors from being sucked into the frenzy of high-volume trading on platforms such as Robinhood.

Robinhood, which allows only online trading, charges its customers almost nothing to undertake the transactions. The platform makes money by channelling trades to bigger brokers, such as Citadel Securities and Virtu Financial, in a mechanism called “payment for order flows” (PFOF).

As for retail investors, they could get sucked into buying stocks that are often talked about on Robinhood’s chat platform. One such counter, GameStop, saw a huge surge in its share price last year despite being a loss-making company. The retailers eventually lost out.

In a related development, the SEC last week charged eight individuals for using social media platforms such as Twitter and Discord to profit US$100 million by influencing their followers to trade exchange-traded stocks.

Malaysia has had its fair share of stock market “influencers”. They took advantage of the rapid rise in retail traders during the pandemic. Most of the influencers drew interest by churning the trading volume of penny stocks.

Retail investors tasted success in early 2020, when they bought into glove stocks. Later, they got greedy and put money into penny stocks that were going into the glove manufacturing business. What was alarming was that a pattern of listed companies buying into other listed companies emerged.

The retail frenzy fizzled out late last year. Today, the glove and penny stocks are a fraction of the prices they were being traded at 18 months ago.

The Securities Commission Malaysia should perhaps take a leaf from the imminent changes to the rules that the SEC is making to further safeguard retail investors from manipulative schemes and so-called “influencers” on Bursa Malaysia.

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