The U.S. Securities and Exchange Commission waded into the battle between small investors and Wall Street hedge funds, warning brokerages and the pack of social-media traders that it was watching for potential wrongdoing.
The so-called “Reddit rally” has inflated stock prices for GameStop and other previously beaten-down companies that individual investors championed on social media forums.
GameStop surged 83 per cent on Friday after brokers including Robinhood eased some restrictions on trading. On Thursday, GameStop shares slid following the trading halts from Robinhood and other trading apps, which drew outrage from politicians and calls for action from regulators.
Headphone maker Koss Corp. more than doubled in value, although it and GameStop remained below peaks reached earlier this week.
Hedge funds and other short sellers had bruising week. GameStop short sellers endured mark-to-market losses of US$19.75-billion so far this year, according to S3. Even so, the stock remained highly shorted with US$11.2-billion short interest.
The SEC, traditionally cautious with public pronouncements, issued a rare joint statement from its acting chair and commissioners. It said it was working closely with other regulators and stock exchanges “to protect investors and to identify and pursue potential wrongdoing” and would “closely review actions ... that may disadvantage investors” or hinder their ability to trade stocks.
The showdown between small traders and professional short-sellers also drew scrutiny from lawmakers and U.S. President Joe Biden’s administration. It is being probed by the New York Attorney-General.
The battle has roiled global equity markets, as funds were forced to sell some of their best-performing stocks, including Apple Inc., to cover billions of dollars in losses on short positions.
“The markets were vulnerable to a decline ... and this Reddit activity was the catalyst that sort of triggered the sell-off,” said Sam Stovall, chief investment strategist at CFRA Research.
On Reddit forum WallStreetBets, whose almost six million members are seen as having driven the trading, GameStop and AMC remained overwhelmingly favoured stocks.
Others include AMC Entertainment and Express, each up 60 per cent on Friday. Bed Bath & Beyond added 13 per cent, Virgin Galactic was up 10 per cent, and Nokia gained 6 per cent. American Airlines fell 4 per cent after a huge rally the prior session.
Since the start of the week, Blackberry Ltd. more than doubled to touch a peak of US$36 on Wednesday before easing back to US$20.39 on Friday. Silver continued a blistering rally.
Robinhood said on its website it was easing some restrictions, but still not allowing purchases of fractional shares in GameStop and 12 other companies, meaning smaller investors must bet more to buy-in further to the trade.
The brokerage was also maintaining numerical limits on the number of shares any one account could hold in each of the companies, further hampering players with existing positions from betting on more gains. It has said its hand was forced by the surge in market volatility.
Commission-free trading platform Freetrade said it disabled buy orders for U.S. stocks. The U.K.-based startup’s statement cited an unexpected decision from its foreign exchange provider and their bank to limit trade volumes.
Noted short-seller Andrew Left, who runs Citron Research and sparked the slugfest with his call against GameStop, handed the retail pack a victory with a YouTube video saying his company would no longer publish short-selling research.
“When we started Citron, it was to be against the establishment, but now we’ve actually become the establishment,” Mr. Left said.
Facebook Inc. temporarily took down a popular Wall Street discussion group, Robinhood Stock Traders.
GameStop and other companies have said little about the volatility in their shares. GameStop did not reply to multiple requests for comment. AMC, BlackBerry and Koss did not immediately respond to requests for comment.
Other winners on Friday included Bitcoin which jumped as much as 14 per cent to a two-week high after Tesla Inc. chief Elon Musk, who has a record of making market-moving comments, tagged the cryptocurrency in his Twitter biography.
Robinhood said Friday it had temporarily disabled a feature on its app that allows users to buy crypto securities instantly.
The chief executive of the London Stock Exchange, David Schwimmer, said regulators should watch out for market manipulation.
“We’ve seen disruption by new technology and social media in a number of other industries so in some ways it’s not surprising to see it in financial markets,” he said.
Central bank and government stimulus have propelled stock markets to record highs in recent weeks, encouraging a wave of retail investors who pushed trading volumes to new heights.
“I’m confident that these types of social channels have the potential to cause further disruption to the status quo and challenge the financial elite,” said Paolo Ardoini, chief technology officer at cryptocurrency exchange Bitfinex.
Robinhood has been one of the hottest venues in the retail-trading frenzy but its sudden curbs on buying set off online protests as the firm tapped credit lines to ensure it could continue trading.
The brokerage said it had raised more than US$1-billion from its existing investors after high volumes and volatility of trading strained it this week.
A website on the short squeeze strategy set up by one WallStreetBets participant, told traders with Robinhood accounts to “find a new broker asap,” listing rivals Vanguard, Ameritrade and Fidelity.
Both Ameritrade and Charles Schwab placed some restrictions on trade on Thursday. Fidelity says it has not limited trading in the stocks.
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