in

'We don't regulate euphoria,' says former SEC Chairman Jay Clayton, who breaks down why social media will likely continue to influence investing

Jay Clayton speaking at the 2019 Delivering Alpha conference in New York.
Adam Jeffery | CNBC

“At the end of the day, that increased demand was clearly driven by social media,” Clayton said. “That tells you the power of social media.”

Meme stocks

That power is likely to stay, according to Clayton, who is now a senior policy advisor and counsel at Sullivan & Cromwell and nonexecutive chairman of Apollo Global Management.

The SEC has long regulated the power of people who have asymmetric information on certain stocks, such as specific company knowledge, that would influence price, he said.

But any guidelines for investors outside that group is much more difficult to enforce.

“We’ve generally allowed the public — for First Amendment and other considerations — to have their own views on stocks,” he said. “The idea that we’re going to regulate retail investor opinion on stocks is a difficult one for people to get their head around.”

This applies even to celebrities, such as Elon Musk, whose tweets around certain stocks and cryptocurrencies not related to his businesses have impacted price.

“Beyond manipulation or asymmetric information, we generally respect the ability of people to share their opinions,” Clayton said. “Now if their opinions continue to be wrong, hopefully their status continues to diminish over time.”

Cryptocurrencies are also driven by social media

The influence of social media has also been seen in cryptocurrencies, and especially the rally in dogecoin, a digital coin that was started as a joke.

“We don’t regulate euphoria, and it’s really not possible to regulate euphoria,” said Clayton. “How do I decide how much of a price runup is too much?”

As a regulator, it’s difficult to make that call, he added, as it’s generally only known that a rally became overextended in hindsight. Because of this, it’s unlikely that the SEC would spend a lot of resources necessarily trying to reel in that kind of frenzy.

What new investors should keep in mind

Of course, this still means that new investors can get swept up in hype and bet hard-earned money on assets without understanding the risks they’re taking on.

New investors have also been potentially encouraged by the recent stock market boom, said Michael Sonnenshein, CEO of Grayscale Investments, during the roundtable Monday.

“For the last 18-plus months, the stock market has done basically nothing but go up,” he said. “That is a very unusual circumstance as an investor, and unfortunately it’s going to lead to some eventual harsh reality where not everything you buy just magically goes up.”

Hopefully, as investors pile into the market, they also learn about investing fundamentals and diversification to protect themselves, Sonnenshein added.

SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox.

CHECK OUT: How to make money with creative side hustles, from people who earn thousands on sites like Etsy and Twitch via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

Source: Investing - personal finance - cnbc.com

Ethereum 2.0 imminent with the Beacon Chain’s Altair upgrade

Congress has a new plan to fix Social Security. How it would change benefits