FILE – This Monday, June 29, 2020 photo shows the Reddit logo on a mobile device in New York. (AP Photo/Tali Arbel)

FILE – This Monday, June 29, 2020 photo shows the Reddit logo on a mobile device in New York. (AP Photo/Tali Arbel)

Regulators eye Reddit stock rallies, but manipulation may be hard to prove: Experts

Canadian law prohibits artificially affecting the price of a publicly traded security in a co-ordinated way

Canadian regulators have said they will act if they see “abusive” or “manipulative” trading, as Reddit and other social media sites stoke stock mania.

But experts say that legal action is not straightforward: it depends on whether rallies in stocks like BlackBerry and GameStop are co-ordinated and harmful or simply cases of contagious excitement.

It’s a debate that’s playing out on the forums themselves.

On Reddit’s Bay Street Bets, one user wrote of BlackBerry’s stock, “We will support it and make it climb together,” while another decried the idea that individual investors are some sort of Reddit army.

Lawyer Chris Sunstrum says that based on what’s been reported so far, the stock mania on Reddit forums is still in a grey area for regulators.

“Does this constitute market manipulation? … I think what the regulators are trying to figure out is, have they crossed that line,” says Sunstrum of Goodmans LLP.

“Your typical retail investor just going on a chat board and giving their opinion, or helping rally the troops behind buying GameStop, is probably not going to be offside.”

The warning about manipulative trading from the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada on Monday came after BlackBerry shares whipsawed over the previous week, mirroring trends seen in the U.S. with GameStop, AMC and other securities.

Canadian silver mining companies have also seen a boost recently, although chief executives and Reddit users alike said social media is not the only factor behind the precious metal’s rise.

So far, the social media dynamic around so-called meme stocks doesn’t fit “neatly” into any of Canadian securities laws, says Sunstrum — although it is still early days on the enforcement front.

Sunstrum says that out of all the potential accusations that could be brought against Redditors, market manipulation could become the biggest focus.

Canadian law prohibits doing something to artificially affect the price of a publicly traded security in a co-ordinated way, he says, though it can be a high bar to prove.

Another legal ramification for Reddit activity could be the charge of advising people about trading securities without the proper registration, though Sunstrum says it’s not clear that’s been the case over the past week.

Sunstrum says that other offences that could come into play include misrepresentation, where a person or company makes a statement that they know or should know is misleading or untrue in any material respect.

To fall into this category, the statement would be expected to have a significant impact on the market price of the shares, Sunstrum says, although he noted that defamation and libel could also come up as separate legal issues.

Ernest Wong, director of research at Baskin Wealth Management, says the Canadian market already has some limits in place that make it unlikely the situation in the U.S. will play out exactly in Canada. Canadian regulators and finance websites don’t list short-selling activity in the same way as the U.S., and the options market here is much smaller, Wong says.

Queen’s University associate professor Mohamed Khimji says further regulation also risks doing more harm than good.

“Is market manipulation the right expression? I don’t really have a problem with using that expression … I think the question is, really, is the activity harmful? Does it have negative effects on market confidence, the credibility of the stock markets in general?” asks Khimji, who researches business law.

“Any kind of buying and selling activity is going to manipulate the price at some level. That’s just how trading works.”

Khimji says that Canadian securities regulators tend to take the lead from U.S. regulators, and that action south of the border will give Canadian regulators something to go off. But, says Khimji, the market may adjust on its own.

“They’re really just two groups that have two different trading strategies … Both sides will learn lessons by the end of it,” says Khimji, referencing short-sellers as one group and retail investors as another. “I think this will just be priced in. Any short-seller of the future will think about this as a risk right here: what happened with GameStop, retail investors buying it up when it’s really cheap and driving up the price.”

Increasing regulation on retail investors could actually have the detrimental effect of limiting participation in the market, says Khimji.

“From a democratic perspective, I think it’s just helpful for as much (of) society to participate in the markets as possible. In any kind of regulation we need to be really sure that it’s going to help and not inhibit access,” he says, adding the stock market “shouldn’t just be for wealthy people.”

Anita Balakrishnan, The Canadian Press


Like us on Facebook and follow us on Twitter.

Want to support local journalism during the pandemic? Make a donation here.

Stocks

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Butter and sourdough bread is shown at a house in Vernon, B.C. on Wednesday, February 24, 2021. A Quebec dairy farmers’ group is calling on milk producers to stop feeding palm oil or its derivatives to livestock as controversy churns over how these supplements affect the consistency of butter. (THE CANADIAN PRESS - Jesse Johnston)
Poll: Care to spread your feelings on butter?

Reports of hard butter have rattled the Canadian dairy industry

A dose of COVID-19 vaccine is prepared at a vaccination clinic in Montreal’s Olympic Stadium on Tuesday, Feb. 23, 2021. THE CANADIAN PRESS/Paul Chiasson
39 new cases of COVID-19 in Interior Health region

The total number of cases in the region since the pandemic began is now at 7,334

Arrow Lakes Caribou Society said the new caribou pen near the Nakusp Hotsprings is close to completion. (Submitted)
Maternity caribou pen near Nakusp inches closer to fruition

While Nakusp recently approved the project’s lease, caribou captures are delayed due to COVID-19

Illuminate Spirit Revelstoke Society said Revelstoke’s dark downtown core is unwelcoming. Lighting would make it more inviting and a point of interest. (Liam Harrap/Revelstoke Review)
New community group hopes to ‘light up’ Revelstoke

Illuminate Spirit Revelstoke Society aims to purchase decorative lights for the downtown core

Kootenay-Columbia MP Rob Morrison speaks during Question Period in the House of Commons. File photo.
Kootenay-Columbia MP supports motion condemning Uighur genocide

Rob Morrison says labelling Uighur persecution as a genocide sends a message to Chinese government

Abbotsford’s Kris Collins turned to TikTok out of boredom when the provincial COVID-19 lockdown began in March 2020. She now has over 23 million followers on the video app. Photo: Submitted
Internet famous: Abbotsford’s Kris Collins is a TikTok comedy queen

Collins has found surprise stardom alone with a phone

Pig races at the 145th annual Chilliwack Fair on Aug. 12, 2017. Monday, March 1, 2021 is Pig Day. (Jenna Hauck/ Chilliwack Progress file)
Unofficial holidays: Here’s what people are celebrating for the week of Feb. 28 to March 6

Pig Day, Canadian Bacon Day and Grammar Day are all coming up this week

Staff from the Marine Mammal Rescue Centre, passersby, RCMP and Nanaimo Fire Rescue carried a sick 300-kilogram steller sea lion up the steep bluff at Invermere Beach in north Nanaimo in an attempt to save the animal’s life Thursday. (Photo courtesy Marine Mammal Rescue Centre)
300-kilogram sea lion muscled up from B.C. beach in rescue attempt

Animal dies despite efforts of Nanaimo marine mammal rescue team, emergency personnel and bystanders

Doctors and counsellors warn of an increase in panic attacks, anxiety, depression and suicide ideas between ages 10 to 14, in Campbell River. ( Black Press file photo)
Extended pandemic feeding the anxieties of B.C.’s youth

Parents not sure what to do, urged to reach out for help

Kara Sorensen, diagnosed with lung cancer in July, says it’s important for people to view her as healthy and vibrant, rather than sick. (Photo courtesy of Karen Sorensen)
B.C. woman must seek treatment overseas for inoperable lung cancer

Fundraising page launched on Karen Sorensen’s behalf, with a goal of $250,000

Join Black Press Media and Do Some Good
Join Black Press Media and Do Some Good

Pay it Forward program supports local businesses in their community giving

Gina Adams as she works on her latest piece titled ‘Undying Love’. (Submitted photo)
‘Toothless’ the kitty inspires B.C. wood carver to break out the chainsaw

Inspired by plight of a toothless cat, Gina Adams offers proceeds from her artwork to help animals

B.C. Finance Minister Selina Robinson presents bill to delay B.C.’s budget as late as April 30, and allow further spending before that, B.C. legislature, Dec. 8, 2020. (Hansard TV)
How big is B.C.’s COVID-19 deficit? We’ll find out April 20

More borrowing expected as pandemic enters second year

The first of 11 Dash 8 Q400 aircraft's have arrived in Abbotsford. Conair Group Inc. will soon transform them into firefighting airtankers. (Submitted)
Abbotsford’s Conair begins airtanker transformation

Aerial firefighting company creating Q400AT airtanker in advance of local forest fire season

Most Read