The New Zealand regulator has asked investment platforms to remind investors of the rules or face potential criminal prosecution in the wake of rising retail investor activism in the United States.
Rob Everett, chief executive of the Financial Markets Authority, yesterday told a gathering of financial services leaders that the GameStop saga where retail investors allegedly deliberately pumped up stocks to take down a couple of hedge funds who had big short positions was a sign of major change in the market that was a "little scary" for regulators.
"This weaponised use of options by retail investors is going to fundamentally change US markets if it hasn't already. The power of the crowd evident in that situation will be making hedge fund managers and regulators deeply uncomfortable."
Everett said it had recently issued guidance on the subject and had encouraged the online platforms to remind their customers of their obligations.
"More work will be necessary from us, the industry, NZX, providers, advisers, everybody in this area to try to stay clear of disorderly markets or poorly informed retail investors staring down the barrel of a criminal prosecution."
Asked if it was a permanent change in behaviour, Everett said he believed it was.
"I think we hit a tipping point in the US where the power of the crowd - I think it is the first time retail investors have realised that they can actually do significant things as long as they band together."
He said as a regulator words like collusion and manipulation gave him a chill up his spine.
"But what you have seen is retail investors deciding they are not going to be constrained by the market as they have previously, operating at the behest of institutions.
"I think it's a permanent change, I think it's a bit scary, a bit entertaining, but I think a lot of regulators will be extremely anxious about how the existing rules around market manipulation fit a scenario where people are trading not specifically for investment purposes but trading for impact and I think that is going to be interesting."
Richard Klipin, chief executive of the Financial Services Council which hosted the event, said he was fully briefed on the GameStop situation by his 19-year-old on what was going to happen.
"[He said] Reddit - there is a whole community and they are against these people and this is what they are gong to do and this is what they did. And then it played out live."
Klipin asked Everett how regulators could ever control that kind of scenario.
"If I was in the US I would be in a sweat," Everett admitted.
"I honestly don't know with a market as big and as powerful and as many chat rooms and forums as that how you go about asserting some control."
He said New Zealand was somewhat simpler and easier.
"I think it is about working really hard to make sure investors know where the guardrails are. And if investors do want to go on and have a bit of fun and cause a bit of mischief that they understand where are the boundaries and if they go past those boundaries they may get a call."
He said the NZX had an important job to not only monitor trading for signs of manipulation but to start looking at chat rooms to work out where the trading was coming from there.
"In such an illiquid market as the NZX or market which such a proportion of illiquid stocks the risk of people up to no good is quite significant and it will require a lot of care."
He said he was a huge fan of people getting involved in stock markets and investing.
"There hasn't been enough of it in New Zealand compared to most of the other jurisdictions that I've worked in. There has been a real lack of attention paid to capital markets and what is happening - everyone is too busy saving up for their investment property."
Everett said it was important to have people willing to come into the market and have a go.
"Some of those people will learn important lessons about investing as they play and for those more serious about investing there is a lot of material available and we have to keep putting that out there."
But he said the online platforms had to be very careful about unwittingly encouraging people into poorly informed activity by what they put on their websites and how they put it up.
"I think it is a balance for me. I love the fact some of the power of investing has been taken out of the hands of the institutions - I think that is long overdue but you worry some of the people that might be playing at this point are going to play to the point where it significantly harms them when the inevitable drop comes."