SEC ‘Closely Monitoring’ Stock Price Volatility As GameStop Saga Continues to Unfold
WASHINGTON – The Securities and Exchange Commission said Friday it is “closely monitoring and evaluating” the extreme price volatility of certain stock trading prices over the past several days.
The announcement came at the end of a week when amatuer traders organizing on the social media platform Reddit caused massive disruptions on Wall Street.
The statement from Acting SEC Chair Allison Herren Lee and Commissioners Hester Peirce, Elad Roisman and Caroline Crenshaw, did not mention GameStop — the traders’ preferred stock — or any social media or trading platforms by name.
However, they noted that while the market’s infrastructure “has proven resilient” this week, “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”
Meanwhile, at the White House, Press Secretary Jen Psaki deferred questions on the trading situation to the SEC statement.
“We respect the role of regulatory agencies … it is under their purview at this time,” she said, during Friday’s press briefing.
What’s Going On?
Wall Street’s wild ride began when shares of GameStop, which was trading at about $19 a share at the beginning of the month, suddenly began to surge — rising to $325 a share at the close of the markets on Friday afternoon.
The unlikely source of the sudden interest in GameStop, a video game and electronics retailer, was users of Reddit, specifically, investors who belong to an online Reddit subgroup called r/wallstreetbets.
According to published reports, they banded together to buy stocks in GameStop and other entertainment related companies like Blockbuster and AMC Theaters, after they realized these stocks were being shorted by Wall Street hedge funds.
As a result of the sudden surge in trading of these stocks, investors, and the hedge funds in particular, were caught in a so-called “short squeeze,” in which they had to race to make up for the losses their hedge strategy was suddenly incurring.
Eventually, trading apps such as Robinhood and TD Ameritrade temporarily halted trading for GameStop and other companies, prompting criticism and concern over market manipulation.
To date, at least one class action has been filed by Robinhood users over the app’s removal of GameStop from its platform.
According to the lawsuit, “Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers.”
What Will the SEC Do?
According to the SEC’s statement, the Commission intends to respond to the stock market activity by working to, “protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.”
But that assertion was as heavy on jargon as it was empty of specifics.
“The Commission is working closely with our regulatory partners, both across the government and at FINRA and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing,” continues the statement.
Without mentioning Robinhood, the Commission said it “will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
What Happens Now?
Both Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, and Rep. Maxine Waters, D-Calif., have announced their intention to hold hearings in coming days on the market volatility and the role social media and trading platforms have played in it.
“People on Wall Street only care about the rules when they’re the ones getting hurt,” Brown said in a statement.
“American workers have known for years the Wall Street system is broken – they’ve been paying the price. It’s time for the SEC and Congress to make the economy work for everyone,” he said.
Waters said in her own written statement that “addressing predatory and manipulative conduct” is the responsibility of lawmakers and securities regulators.”
“As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors,” Waters said.
She noted that “hedge funds have a long history of predatory conduct” that is “indefensible” and this type of “unethical conduct directly led to the recent market volatility.”
Where these sessions will lead is anybody’s guess.
According to at least one hedge fund manager who spoke to The Well News on background, meting out any real punishment for the behavior would depend entirely on regulators finding concrete evidence of collusion — like deliberately trying to fix stock prices or sharing insider information.
Short of that, Congress and regulators could find themselves venturing into the entirely “new territory” of how to regulate individual investors who post their investment plans to a social media platform, the hedge fund manager said.
Meanwhile, on Friday, Texas Attorney General Ken Paxton issued 13 Civil Investigative Demands to Discord, Robinhood Financial, Robinhood Markets, Robinhood Securities, Interactive Brokers, TD Ameritrade, TD Bank, E-Trade, WeBull Financial, Public Holdings, M1 Holdings, Citadel Financial, and Apex Clearing Corporation.
“Wall Street corporations cannot limit public access to the free market, nor should they censor discussion surrounding it, particularly for their own benefit … It stinks of corruption,” said AG Paxton in a statement.
The full text of the CIDs can be found here.