The US Securities and Exchange Commission in Washington, DC
Adam Jeffery | CNBC
The Securities and Exchange Commission announced on Friday that it will help protect investors by reviewing recent trading volatility that has caused stocks like GameStop and AMC Entertainment to soar.
In a statement, the country’s top financial regulator pledged to protect individual traders and to examine measures taken by brokers that “could disadvantage investors or otherwise unduly hinder their ability to trade certain securities”.
“We will act to protect retail investors when the facts show abusive or manipulative trading activity that is prohibited by federal securities laws,” the SEC said.
“The Commission is working closely with our regulatory partners, both in government and at FINRA and other self-regulatory organizations, including exchanges, to ensure that regulated companies meet their obligations to protect investors and identify and prosecute potential misconduct.”
The explanation came as sharply shortened, soaring stocks rose again during Friday’s session. Video game retailer GameStop, theater operator AMC and headphone maker Koss were up 50%, 53% and 43%, respectively.
The SEC’s promise to curb brokerage deals that may have “unduly” restricted customers’ tradability is good news for members of WallStreetBets Reddit and other retailers who sparked the rally.
When asked if they were contacted by the SEC, the WallStreetBets site moderators said in a Twitter post on Friday that the regulator had not yet contacted.
By buying the sharply shortened stocks or their call options, retail investors have forced investors betting against the stocks known as short sellers to cover their positions by repurchasing stocks to avoid further losses.
If this happens on a massive scale, it is called a “short squeeze” and can lead to a dramatic, volatile rise in the share price.
Many individual traders took to Twitter and other social media platforms on Thursday to protest Robinhood’s decision to restrict access to certain stocks at the center of the controversy.
The high trading volume puts pressure on online brokers like Robinhood, who customers have to pay in cash when closing a position. The brokers also needed additional cash to provide their clearing facility with additional capital and to protect trading partners from excessive losses.
Robinhood later said it would allow limited purchases in GameStop and other volatile stocks on Friday.
For the week, GameStop is up 420%, Koss is up 1,800%, and AMC is up 280%.
The sharp swings in such stocks, as well as Robinhood’s decision to restrict trading, have drawn the ire of politicians on both sides of the political aisle.
Senator Elizabeth Warren told CNBC Thursday that she blamed the SEC’s failure to act for the days of flash of market speculation.
“We need an SEC that has clear rules for market manipulation and then has the backbone to enforce and enforce those rules,” said the Massachusetts Democrat. “To have a healthy stock market, you have to have a cop on the beat.”
A pedestrian walks past a GameStop Corp. store in Rome, Italy on Thursday, January 28, 2021.
Alessia Pierdomenico | Bloomberg | Getty Images
“That should be the SEC,” she added. “You have to step up and do your job.”
North Carolina MP Patrick McHenry, the senior Republican on the House Financial Services Committee, said Friday he was concerned about unequal access to capital markets.
I want to “make sure we don’t stop people from having additional access to markets and therefore leave them to activities like we’ve seen with GameStop and some other tradable stocks,” he said on Squawk Box.
“What I’m seeing here is this bigger case: average, everyday investors are excluded from the access that insiders like C-suite members get from corporations, and hedge funds and private equity get natural access,” he added. “And that the credit investor standard has turned our markets into an extremely prosperous lie.”
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