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Key Takeaways & Insights

The outrage over the GameStop trading restrictions is overshadowing the real risk to investors and the financial markets. Learn what that risk is in the latest commentary from our Investment Office.


  • The orderly functioning of financial markets depends on properly regulated and executed rules of financial exchange.
  • If short squeezes continue, the virtues of fluid stock markets may be forfeited.
  • Breaking the efficient system of clearing trades is not a risk worth taking.

The past two weeks have seen an astonishing number of allegations about the motives of the main actors in the GameStop drama. The players include the Wall Street Bets forum on Reddit, the Robinhood trading app, long-short hedge funds, politicians, and regulators, to name a few.

However, to equate this event with the other issues facing our country – the pandemic, social unrest, economic despair and political discord – is a false equivalency. It is an attempt to right one injustice with another. In short, it is a canard – a decoy to lure attention from the real risk of the GameStop short squeeze and the accompanying spike in other, heavily-shorted stocks.

“. . . the hypocrisy of the political leaders who say you can’t open your business and run your business and make a living in the pandemic. We won’t pass a stimulus bill on time. And oh, by the way, now you can’t trade.”

– Tyler Winklevoss CNBC, January 28, 2021


Robinhood, meanwhile, is “saying, ‘Hey, hedge funds are gettin’ smoked, billionaires are getting smoked, so we’re no longer gonna let you trade on certain stocks… so all our hedge-fund billionaire friends can get out and not get killed.”

– Barstool Sports CEO David Portnoy on Twitter, January 28, 2021


“Now, all of a sudden, retail can be on the same footing, and they don’t have to be the ‘bag holder’ to Wall Street.”
– Chamath Palihapitya, CNBC, January 27, 2021

An Issue Bigger than Sound Bites

That risk is the threat posed to the orderly functioning of the financial markets. The United States, and the world generally, have benefited for centuries from the discipline of properly regulated and executed rules of financial exchange. Companies have been able to raise capital to seed new business ideas and expansion opportunities. Savers have been able to invest in these companies, knowing there are stringent rules for how their capital will be treated. Business failures are shown the door in stock prices that can and will go to zero. The result? Economic expansion, job growth and productivity. In short, properly functioning financial markets enhance the quality of life.

If the events of the past month continue, in which failing businesses see their stocks go up 16-fold in a month, the virtues of fluid stock markets may be forfeited. Capital will not be allocated to the businesses that need and deserve it. Investors and the advisors who serve them will sit out investment opportunities, unsure of what a security is really worth. And ultimately, the aggrieved Reddit Wall Street Bets subscribers and Twitter warriors will find themselves looking for scarce employment opportunities in a slack economy.

The potential risk is not just a valuation or capital allocation question. Back-office operations that allow stock purchases to occur are being stressed. It is a testament to operational excellence that in less than the blink of an eye, a buyer is found for every seller on a stock exchange and vice versa. There are no “runners” shuttling physical certificates to the vaults at various banks. Trade settlement does not take a week. It is effortless. Along the path to clearing a trade are multiple players and multiple points at which a breakdown can occur. These include clients, prime brokers, market makers, the Depository Trust & Clearing Corporation (DTCC) and margin lenders. It has yet to be seen whether any breaks will occur in the settling of last week’s trading activity. However, it seems wise to pause the flow, whether through higher margin requirements or trading restrictions, until that answer is known. Breaking the efficient system of clearing trades is not a risk worth taking.

The Real Question to Ask

As we go through congressional hearings and the public shaming that is likely to come, let’s not lose sight of the truth. Whether the Reddit events are idiosyncratic or catalyze a more systemic problem is unknown at this time. However, it is the question that should be answered instead of the virtue-signaling that is going on. Let’s hope that when investigations are done, and books are written, market participants and regulatory authorities will feel the right actions were taken over the past week – even if that meant certain parties did not get everything they wanted (e.g., unrestrained trading). If that is the outcome, confidence in the financial markets will be maintained and possibly even enhanced, benefiting the markets, the economy, and the majority of individuals participating in both.

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Meet the Author

James Lebenthal

Partner & Chief Equity Strategist

Jim is the firm’s Chief Equity Strategist and a Partner in the New York office. He has over twenty-five years of experience managing investment portfolios, and is a regular contributor on CNBC.

Prior to joining Cerity Partners, Jim served as the Chief Executive Officer and Chief Investment Officer of Lebenthal Asset Management LLC, where he developed, advised and served client relationships. Prior to joining Lebenthal Asset Management in 2007, he was a financial advisor for Goldman Sachs and a partner of investment firm Levy Harkins.

Jim currently serves as the Chairman of the Board of Trustees of Mizzentop Day School and as a Director of the Akin Hall Historical Association. He was a Lieutenant of and qualified as a nuclear submarine engineer in the United States Navy where he was awarded 2 Navy Commendation Medals and 4 Navy Achievement Medals.

Jim holds a BA in molecular biology from Princeton University, an MBA from The Wharton School of Business, and a Chartered Financial Analyst designation.

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Ben Pace

Partner & Chief Investment Officer

Ben is the Chief Investment Officer and a Partner in the New York office. He leads the firm’s Investment Committee and is a member of the Executive Committee. He has more than thirty-five years of experience in investment management. Ben has been featured in the Wall Street Journal and Reuters, and is a frequent commentator on Bloomberg TV and radio, Fox TV and CNBC, appearing regularly on network programs such as Power Lunch, The Closing Bell, Squawk Box, and Worldwide Exchange.

Prior to joining Cerity Partners, Ben was Chief Investment Officer and Head of Global Investment Solutions for Deutsche Bank Private Wealth Management in the U.S. In his role as CIO, he sat on the PWM Global Investment Committee, providing input on the U.S. economy and capital markets. He oversaw the investment strategy and asset allocation for PWM clients in the U.S. As Head of Global Investment Solutions, he brought together PWM’s capital markets and investment capabilities in an effort to provide an effective and consistent experience for clients. Prior to joining Deutsche Bank in 1994, he managed equity income funds for two investment organizations. During his tenure with those institutions, he also served as a securities analyst with a particular emphasis on the financial services and healthcare industries.

He earned his Bachelor of Arts in economics from Columbia University and Master of Business Administration in finance from New York University.

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Tom Cohn

Partner & Deputy Chief Investment Officer

Tom is the Deputy Chief Investment Officer and a Partner in the New York office. He has nearly ten years of experience in various investment management roles. Tom is a member of the Investment Committee, Investment Manager Selection Sub-Committee, the Compliance Sub-Committee and the Performance Monitoring Sub-Committee.

Before joining Cerity Partners, Tom served as an Investment Analyst at Spero-Smith Investment Advisers where he was responsible for the due diligence and analysis of third-party managers and assisted in global market and asset allocation research. Prior to joining Spero-Smith, Tom worked as a Registered Investment Advisor in Syracuse, NY, where he researched a factor-based investment strategy. He started his career as an analyst in the Corporate Debt Products group at Bank of America in Boston, where he worked on a team that managed the bank’s exposure to a portfolio of middle market and multinational companies.

Tom earned a Masters of Business Administration from the S.C. Johnson Graduate School of Management at Cornell University. At Johnson, he served as a portfolio manager on the Cayuga Fund, a student-run, market-neutral hedge fund. He earned a Bachelor of Science degree in Business Administration from Boston University. Tom holds the Chartered Financial Analyst® designation.

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