Meme stocks loom large in the CSA’s short-selling review
James Langton, 22 March 2021
When a group of retail traders used Reddit to gleefully gang up on a handful of hedge funds in January, giving birth to the concept of “meme” stocks, they cranked up an already simmering debate about proper public discourse related to trading. In Canada, a consultation regarding activist short-sellers is the focus of that debate.
Late last year, the Canadian Securities Administrators (CSA) published a consultation paper on the role and regulation of activist short-sellers — traders who publicly air their negative views on the stocks they’re shorting.
Defenders of the practice maintain that vocal short-sellers are the only thing standing between unrelenting upside hype and ordinary investors — i.e., their skepticism and scrutiny help expose corporate fraud and misconduct, aiding naive regulators and investors alike.
“Yes, short-sellers sometimes make money when other investors lose, but that is only the proximate effect of their activity,” stated a submission to the CSA from the Alternative Investment Management Association.(AIMA). “Their long-term effect is a maintenance of the very essence of capital markets,” thus ensuring there’s information circulating in the market that’s accurately reflected in the prices of securities.
Critics, however, argue that activist short-sellers are a scourge on the markets, recklessly bashing good companies with the sole goal of driving trading profits.
The Canadian Investor Relations Institute (CIRI), a trade group for investor relations professionals at public companies, stated in a submission to the CSA that CIRI’s members “are extremely concerned about activist short-selling, particularly given recent activity related to issuers such as GameStop [Corp.] and BlackBerry [Ltd.]” CIRI’s submission cited those episodes as evidence of “the negative impact activist short-selling has on market efficiency and price discovery.”
The meme stock phenomenon appears to have originated with unorganized retail traders attacking hedge funds that held large short positions in certain stocks — driving those stock prices up to seemingly absurd levels rather than downward. The surge in meme stock trading has raised concerns about the growing role of social media as a driver of trading activity.
