The seemingly unstoppable bull run for shares in GameStop Corp (NYSE:GME) caused by an ongoing battle between an online army of Reddit retail traders and institutional short sellers has caught the eye of US regulators in what could be seen as a sign of a coming clampdown to prevent such occurrences happening again.
On Wednesday night, the US Securities and Exchange Commission (SEC) said it is “actively monitoring the on-going market volatility in the options and equities markets” and that it is also working with other regulators “to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants”.
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The statement echoed comments from the White House earlier in the day by press secretary Jen Psaki, who also said the situation in the market was being “monitored” after shares in GameStop, a US video game retailer, rocketed 138% in yesterday’s session to close at around US$347. Over January as a whole, the shares have soared 1,914%.
GameStop’s meteoric rise to prominence, most of which has occurred with little to no news from the company itself, originated on the Reddit forum r/wallstreetbets, which serves as an online hub for retail traders looking to exploit stock momentum to cash in.
The online army of retail traders appear to have targeted GameStop shares in response to large short positions taken by hedge funds against the firm. A short position is effectively borrowing shares and selling them immediately on the expectation that the stock will fall in value, allowing a trader to buy back the shares at a chapter price, return them to the lender, and pocket the difference.
However, the intervention of the trading “mob” took the financial institutions by surprise and has so far caused the short sellers to suffer eye-watering losses of over US$3bn so far.
The pile-on also attracted the notice of several influential commentators, with Tesla Inc (NASDAQ:TSLA) boss Elon Musk, who seemingly tweeted his support for the retail day traders of Reddit by proclaiming “Gamestonk!!” and linking to the r/wallstreetbets forum on Tuesday.
The incident has also taken on a broader socio-political character, with many seeing the battle between the Reddit traders and the hedge funds as emblematic of a general disdain for Wall Street and the global wealthy elite as well as a sign of the changing nature of stock market trading amid the proliferation of easily accessible and commission-free trading apps such as Robinhood.
However, the frenzy has also set red lights flashing in the US Treasury amid concerns that the massive influx of fiscal stimulus and liquidity may not be flowing into the real economy but instead creating what Swissquote’s Ipek Ozkardeskaya called “increasingly disquieting anomalies in the markets”.
However, in pre-market trading in New York, the GameStop rally showed no signs of slowing down, with the stock up 37.3% at US$477.