This past week, the stock price of Trump Media & Technology Group (TMTG), the parent company of Donald Trump’s social media start-up Truth Social, has been on a rollercoaster ride. The stock, trading under the ticker symbol DJT, has experienced significant volatility, with prices swinging wildly from day to day. In its inaugural week of trading on the NASDAQ, DJT stock surged by as much as 50%, only to plummet by 21% the following Monday in response to the revelation of a $58.2 million net loss against a meager $4.1 million in revenue for the year 2023. Despite the fluctuations, TMTG managed to maintain a market cap of about $6.2 billion as of earlier in the week.
The volatility of DJT stock is sparking debate, with some online commentators arguing that this is indication of a need for stronger regulation. Proponents of this view likely believe that the wild swings in DJT stock prices are a symptom of a broader problem in the market, where speculation and hype can drive prices far beyond a company’s fundamental value. They may worry about harms to investors, particularly retail investors without the expertise or resources to navigate such turbulent markets.
Critics of DJT are likely to latch on to a proposed regulation from the SEC painted as a cure-all against technology-induced speculation. The SEC proposal is related to the use of predictive data analytics (PDA) by broker-dealers and investment advisers. The proposed rule, which has yet to be finalized, would require financial firms to identify and eliminate conflicts of interest associated with the use of PDA technologies, such as artificial intelligence and machine learning, in their interactions with investors.
However, it’s unclear whether the SEC’s rule would do anything to address the kind of swings we’re seeing with DJT stock. The rule’s provisions primarily include reporting requirements around how firms use algorithms in trading and providing investment advice, rather than address the kind of speculation that can drive meme stock movements.
Moreover, it’s not obvious that this kind of volatility is a problem that requires a regulatory solution. If individuals want to buy DJT stock as a symbolic gesture to express support for former President Trump’s political candidacy, perhaps there is no harm in them doing so. At the same time, if investors believe they can make a quick profit by speculating on a stock’s short-term movements, they should be free to take that risk too, provided they understand the potential downside.
It’s worth noting that the SEC’s proposed rule was written in response to the GameStop saga of early 2021, which bears many similarities to the frenzy around Truth Social’s stock. In both cases, retail investors rallied around a stock that had been heavily shorted by hedge funds, driving prices up to levels that many analysts viewed as unsustainable. Indeed, in recent days Truth Social has been the most expensive stock in the U.S to sell short.
While the GameStop episode certainly raised questions about the role of social media in driving investment decisions, the SEC’s proposed rule is the wrong response. The rule’s reporting requirements and conflict-of-interest disclosures will end up burdening investment advisers and broker-dealers with yet more paperwork and compliance costs, without offering corresponding benefits that address underlying issues.
As the SEC continues to deliberate on its proposed rule, it will need to ensure that any final regulatory action is narrowly tailored to address specific, proven harms. While the desire to “do something” in response to market ups and downs is understandable, every regulatory response must be grounded in a clear understanding of the problem at hand and a realistic assessment of the rule’s impact. Otherwise, the SEC’s actions could end up doing more harm than good.
The fate of the SEC’s proposed rule remains uncertain, as does the future of Truth Social and its stock price. Regardless how this plays out, it will not be the last we hear about social media-induced hype leading to calls for more regulation of financial markets.