I'm not for a laissez-faire society, don't get me wrong.
But a blanket restriction on risk taking as you're hinting at here to 'protect the vulnerable' is a red flag because who decides how wide this net is and the terms of the net. Concretely, what are we allowed to say and not say (the Reddit forum question at stake here), how much are we allowed to have and not have as demonstrable assets to qualify for a trade (Accredited Investor and Qualified Purchaser already exist in the private equity world), etc.
If you take a step back and put a magnifying glass on the principle, protect vulnerable people, you have to ask, what about: smoking, drugs, unhealthy foods in an obesity epidemic, extreme sports, combat sports, driving under the age of 18, and many other questions. What about poor people buying lottery tickets? If I go to a local bodega, I'll stand in line behind people buying lottery tickets, and you can see they are not upper income people.
The world is dangerous and we're all vulnerable, and yes, some more than others. Various societies have to decide on the scale of 0 to 100, how much we allow individual to hurt themselves. The answer will be different in China, Sweden, the United States, and so forth, owing to the values of the societies.
How about protecting vulnerable investors by regulating entities like short selling hedge funds?
It's not a restriction on taking risk. It's a restriction on spreading misinformation to pump and dump a stock. You could say that the perpetrators were meming, or they didn't know the illegality, or they got caught up in the moment but that defense
1) gives too much benefit of doubt to these people. WSB types know very well that what they're doing is unethical and illegal. It's exactly what they accuse hedgefund boogeymen of doing to stir up their victims.
2) This situation isn't as novel as it seems. There are already deliberations and legal mechanisms in place to determine the culpability of someone who only took a small part in a crime, is a first-time offender or whatever other excuse there is.
3) To carry this point home, I think HackerNews already censors (thankfully) links that try to pump random penny stocks. This type of internet scheme is not new, and most of us have already decided it is something we won't tolerate. This behavior is outrageous and it's not made any better because it's happening in broad daylight or on a large scale. We shouldn't be in such awe of the 'revolution' that we are blinded to its impact.
Both of your first two points - which I actually don't disagree with - fail to address the major and unique problem here. And it is this. There are 6 million users on WSB. If you haven't been there (which takes a moment since it is not locked down), you will see stuff like this: a user posts a new post, similar to HN, and they'll maybe post a screenshot of a position with an emoji of diamonds, hands, and rocketships.
Cue thousands of users replying stuff like, "This is the way. To the moon!" with hundreds, sometimes thousands of upvotes.
My question to you is extremely difficult to answer, but it is relevant because old fashioned law enforcement action as you've described aren't so straightforward here: how do you police that?
I suppose someone could use ML to go through the thousands of comments and look for someone saying something like, "There's a short squeeze so let's nab those bastards! Everyone hold!" because those comments do exist, in fact many of them are that. BUT then how would you prevent people talking in code? What if thousands of people just started posting their positions with a thumbs up emoji?
Now my second challenge for you (or anyone who thinks standard SEC protocol is so easily applicable here, open and shut case). What is the difference between a Redditer saying, guys, there's a short squeeze about to happen, buy buy buy! and this:
"Tomorrow am at 11:30 EST Citron will livestream the 5 reasons GameStop $GME buyers at these levels are the suckers at this poker game. Stock back to $20 fast. We understand short interest better than you and will explain. Thank you to viewers for pos feedback on last live tweet
— Citron Research (@CitronResearch)
January 19, 2021"
You could look for anyone who lied about the short position or spread other misinformation and check if they have a financial interest. These laws aren't unenforceable just because a bunch of people did it on the internet.
But a blanket restriction on risk taking as you're hinting at here to 'protect the vulnerable' is a red flag because who decides how wide this net is and the terms of the net. Concretely, what are we allowed to say and not say (the Reddit forum question at stake here), how much are we allowed to have and not have as demonstrable assets to qualify for a trade (Accredited Investor and Qualified Purchaser already exist in the private equity world), etc.
If you take a step back and put a magnifying glass on the principle, protect vulnerable people, you have to ask, what about: smoking, drugs, unhealthy foods in an obesity epidemic, extreme sports, combat sports, driving under the age of 18, and many other questions. What about poor people buying lottery tickets? If I go to a local bodega, I'll stand in line behind people buying lottery tickets, and you can see they are not upper income people.
The world is dangerous and we're all vulnerable, and yes, some more than others. Various societies have to decide on the scale of 0 to 100, how much we allow individual to hurt themselves. The answer will be different in China, Sweden, the United States, and so forth, owing to the values of the societies.
How about protecting vulnerable investors by regulating entities like short selling hedge funds?