Exploring the Market’s Trust Crisis with Jon Stein, CFA, and GameStop

Key Points

• The GameStop saga has sparked a focus on the distinctions between investing, speculation, and gambling.
• There is concern about whether the influx of new market participants will democratize markets or create a new class of “entertainment” investors.
• Trust in financial markets is significantly influenced by the presence of a trusted adviser.

Just days after the release of the Edelman Trust Barometer entitled “Declaring Information Bankruptcy,” Wall Street faced an information crisis triggered by Reddit and GameStop. The market upheaval has prompted discussions on the distinction between investing, speculation, and gambling, particularly in an environment where many gambling outlets have been halted due to COVID-19, and technology has facilitated free and rapid access to markets.

This influx of new market participants raises questions about their long-term prospects. Will it lead to a more inclusive and democratized market, where more people benefit from long-term value creation? Or will it give rise to a distinct “investor class” that views investing as a new form of (often costly) entertainment?

According to a 2020 study by CFA Institute on investor trust, only 39% of retail investors without an adviser find news about financial markets trustworthy, compared to 61% among those with an adviser. Similarly, only 57% of those without an adviser believe they have a fair opportunity to profit from capital markets, whereas this percentage rises to 81% among those with an adviser, underscoring the significant impact of a trusted adviser.

The GameStop saga has brought the market’s trust deficit to the forefront, prompting upcoming hearings by the House Financial Services Committee and Senate Banking Committee of the US Congress. CFA Institute will actively monitor these events and engage with industry stakeholders about investor protection and measures to enhance market integrity and transparency.

However, the GameStop situation is just one facet of a broader trend. In 2017, CFA Institute’s Future of Finance team introduced scenarios of fintech disruption and parallel worlds in the Future State of the Investment Profession. This highlighted the potential for disruption from technological innovation and the impact of mass disaffection related to anti-globalization and populism on markets. It also recognized the dual potential of social media to unite and divide people.

To gain insight into these issues and the way forward, we sought the perspectives of Jon Stein, CFA, the founder of Betterment and a member of the CFA Institute Future of Finance Advisory Council, on the GameStop situation and the future of online financial platforms.

CFA Institute: We’re talking with a lot of investors about whether the GameStop situation was about manipulating the market, and a lot of questions remain. Does market infrastructure need to change? Is the social media narrative now powerful enough to impact market pricing?

Jon Stein, CFA: It appears that the retail investor is having a moment, which is a natural progression considering the emergence of social platforms discussing investing, the ability to trade on a phone for free, and the influence of investing-related social media posts from figures such as Elon Musk. This, coupled with the utilization of social media as a disruptive tool, raises questions about the need for regulation and the impact of the social media narrative on market pricing.

Stein highlighted the need to ponder over regulations and settlement process steps while emphasizing concerns about investor protection and discouraging short-term, value-destructive trading akin to gambling.

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