Reddit went to war with Wall Street—and won—sending shockwaves across global stock markets. In the aftermath, the world’s stock markets wondered: can something like this happen in their country too?

The Correspondent spoke with traders, market analysts, and the Securities and Exchange Commission of Pakistan (SECP) to understand how the Pakistani trading community perceives this new challenge.

What happened on Wall Street?

Members of r/WallStreetBets—the now-famous online forum on Reddit—sent the US stock markets into a crisis when it organised to buy stocks of the struggling physical video game retailer GameStop, sending share prices through the roof and causing losses worth billions of dollars to hedge funds which had shorted the stock (gambled that the price of the stock would go down).

It is estimated that the hedge funds and other institutions shorting the GameStop stock incurred losses of about $19 billion.

On Thursday, the US market regulators moved to shut down trading on Robinhood—the trading app on which most of the stock was being bought—and the Securities and Exchange Commission (SEC) said it was closely monitoring “the extreme price volatility of certain stocks trading prices over the past several days.”

The SEC also issued a warning: “We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity.”

US financial analysts also echoed the SEC’s sentiments, declaiming that this “dangerous new development” allowed social media users to manipulate stocks to their advantage, and it must be stopped.  

Pakistani brokers sound alarm

When asked about existing government regulations preventing such incidents from happening in Pakistan, Pakistani brokers gave mixed statements; some claimed that existing regulations cover such incidents, while others argued that special laws need to be made to deal with these issues.

Ali Poonawala, research head at AKD Securities brokerage house, said: “Mostly, regulations govern insider trading and manipulation with regards to false statements. Usually, the companies whose stocks experience such movements are sent for an inquiry to the Pakistan Stock Exchange (PSX) or the other regulators. There are no specific regulations.”

However, other analysts said that there are laws, made by the SECP in 2017, which prosecute anyone found manipulating stocks, and the matter is then sent to the Federal Investigation Agency (FIA). They added that there are several inquiries pending with the PSX and SECP in this regard.

When asked about Pakistani social media groups that direct their member to buy or sell in a certain way—like the r/WallStreetBets forum on Reddit—brokers said the SECP already takes action against individuals who regularly express opinions on the stock market’s performance on social media, and it is regularly monitoring such actions in Islamabad.

“Even brokerage firms cannot write in their reports regarding manipulation, or which stock will go up or down. Behaving like stock market gurus and making suggestions about investments is illegal.”

“One of the latest forms of market manipulation is issuing a false statement, mainly through social media,” they added. “The SECP is trying to keep a check on such activities.”

“It is sad and worrying to see anyone with almost no or just basic knowledge running an investment advisory on social media,” said CEO of Alpha Beta Core, Khurram Schezad, who has over 14 years of experience in research and investment in the stock exchange, in a phone interview from Karachi.

“It is a potential danger if not managed prudently,” he added. “There should be strict and investment friendly regulations by the SECP to safeguard investors’ interest without losing opportunities provided by the social media spread.”

SECP says it is already prepared

We asked the SECP if it had been monitoring the tussle between Wall Street and Reddit, to which the spokesperson of the regulator replied: “Yes, we are aware of the development. SECP closely monitors the trading of international markets. We as a regulator closely follow any wrongdoing and use best international practices to counter these mala fide and fraudulent activities.”

He added that the SECP is member organization of the International Organization of Securities Commissions (IOSCO), a leading international policy forum for securities regulators, and is recognised as the global standard setter for securities regulation.

“IOSCO’s membership regulates more than 95 % of the world’s securities markets in more than 115 jurisdictions. SECP has been an IOSCO member since 1998, and on its Board since 2012. On this forum, all regulators share their experiences and suggest ways and tools to counter fraudulent activities and market manipulation,” he said.

When asked if the SECP has made any regulations on stock trading through online apps, the spokesperson said: “PSX provides full suite of trading services through KATS, KITS, and BATS. KATS is the Karachi Automated Trading System, which facilitates trading for stockbrokers. KITS is the Karachi Internet Trading System, which is an online system for trading. BATS is the Bonds Automated Trading System. BATS currently provides a trading platform for corporate debt instruments (TFCs), and government debt securities.”

“However, an investor can only trade at PSX systems through a certified, licensed broker,” he added. “The broker may have provided an interface to its investors, which is a bilateral agreement, and beyond our jurisdiction. With that being said, the SECP does not allow trading through online apps. It advises investors to avoid such apps for investment purposes.”

When asked about the crux of the matter —whether the SECP takes actions against social media groups that give trading advice to their followers, which can be used to manipulate the market the same way as Reddit did — the regulator expressed its limitations in policing the vast spaces of social media.

“The SECP has framed and enforced Research Analyst Regulations to regulate the area of investment recommendation and research analysis, to address potential conflict of interest, and to ensure impartiality of recommendations made by research analysts. For standardization and quality assurance purposes, broad guidance has been provided in respect of contents of research reports. Similarly, appropriate disclosure requirements have been prescribed, enabling users of research reports to make unbiased and informed decisions. The regulations also provide for minimum qualifications and experience requirements for research analysts, their general responsibilities, and required records to be maintained, besides providing provisions for compliance, and enforcement mechanism and liability for action in case of default.”

“However, to regulate social media groups which give trading advice is not possible for any regulator and whatever these groups are doing is with the mutual understanding of broker and investor,” he added. “To educate and protect investors, the SECP has initiated awareness campaigns to avoid such platforms and people who lure investors, but at the end of the day, social media is too big for us to regulate.”

Cautious but unconcerned

Most analysts and brokers The Correspondent spoke with did not seem too concerned about “whatever was happening in America.” Many believed that SECP already has methods of stopping such actions, which combined with the ban on trading apps, and the lack of widespread digital literacy, will prevent Pakistanis from replicating what Reddit managed to do on Wall Street.

The SECP, for its part, seemed confident that its existing regulations are enough to tackle any emerging challenges, but should this confidence be tempered by caution?

After all, till Thursday, Wall Street was confident that its regulations protected it from social media fuelled market manipulation.

In an interview with All Things Considered, Jaime Rogozinski, founder and former moderator of r/WallStreetBets, saw this as much more than a simple tussle between a regulator and its relevant stakeholders. “It’s the democratisation of financial markets. It’s giving a voice to the people that didn’t previously have one.”

“For too long it’s been an invite-only club. And it’s been the elites on Wall Street and nobody on Main Street,” he added.

What is happening now, he said, invokes the same sentiments of the Occupy Wall Street protests against corporate greed: “It’s resurfacing in a kind of poetic justice.”

With social media denizens exhorting each other to “hold the line” and “take down the rich,” the GameStop incident has taken tones of class struggle and captured the imagination of individuals worldwide. It would be logical to expect similar actions in nations across the world.


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