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Regulators take notice as Reddit stock onslaught continues

  • Daniel Hoffman

    Agence France-Presse

New York   /   Sun, January 31, 2021   /   12:45 pm
Regulators take notice as Reddit stock onslaught continues People run away from and enter a GameStop during widespread unrest following the death of George Floyd on May 31, 2020 in Philadelphia, Pennsylvania, US. (Agence France-Presse/Mark Makela/Getty Images)

The US Securities and Exchange Commission (SEC) on Friday said its regulators were keeping an eye on the whipsawing share prices of some Wall Street stocks that had been targeted by a social media-driven campaign to make wealthy hedge funds suffer.

"The commission is closely monitoring and evaluating the extreme price volatility of certain stocks' trading prices over the past several days," the SEC said in a statement, a day after some platforms restricted trading in GameStop, AMC Entertainment and other stocks caught up in the surge. 

"We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws."

The regulator also said it "will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."

Investors who organized over Reddit and other forums have in recent days targeted shares of companies that had been short-sold by hedge funds, which have bet that the price of the company would fall.

Their tactics have caused massive spikes in share prices, and on Thursday Robinhood, an app popular among retail investors whose stated goal is to "democratize finance for all," decided to limit trades on the most volatile stocks.

British market watchdog the Financial Conduct Authority also took notice on Friday, issuing a statement saying they were "warning UK investors in certain US listed shares which are being discussed online to use extreme caution. 

"Volatile markets are unpredictable and mean you can quickly lose money."

The move to restrict trades was decried by lawmakers from across the United States.

Texas's attorney general Ken Paxton joined the ranks of those scrutinizing the issue, saying he had launched a probe into Robinhood and 12 other online brokerage services.

The state's top prosecutor sent a civil investigative demand -- a type of administrative subpoena -- to the companies, the latest sign of escalating scrutiny from regulators and lawmakers over the trade suspensions.

Trading of GameStop resumed Friday on Robinhood. 

US media reported the company had also raised $1 billion from its investors to help it stay afloat and allow its customers to continue trading, though on Thursday Robinhood chief Vlad Tenev told CNBC the company was not facing a liquidity crunch.

Robinhood needs to maintain a certain amount of funds in the financial institutions that facilitate orders made on its platforms, and when it sees increased demand, that liquidity needs to increase as well.

Major investors like hedge funds have bet against GameStop, citing the video game chain store's ill financial health as consumers shift towards buying over the internet.

As the company's stock surged under the Reddit-fueled onslaught, the big Wall Street firms were forced to buy back shares at higher prices to cover their losses -- further driving up the price.

Hedge fund Melvin Capital liquidated its position in the company and confirmed to US media that it had received a bailout of $2.75 billion from other investment funds.

GameStop's shares were worth $65.01 at the end of Wall Street trading last week, but ended on Wednesday up 435 percent at $347.51.

On Thursday, it reached $483, before falling after Robinhood and other platforms cut off trade of its stock under the ticker symbol GME. It resumed its upward momentum on Friday, rising 75 percent from the beginning of the session.

The enthusiasm for companies many analysts expect to collapse has spread elsewhere, with movie theater chain AMC, furnishings store Bed Bath and Beyond and business software manufacturer Blackberry all seeing their shares rise.