The US Securities and Exchange Commission is investigating recent dramatic price run-ups in heavily shorted stocks, promoted by retail investors’ groups on Reddit’s boards.
The agency today said it is parsing the activity to probe market instability and see if there is deliberate manipulation or fraudulent intent more broadly on stock markets.
“The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days. Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes. Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence,” the SEC said.
The SEC added that its commissioners are working closely with fellow regulators, including FINRA, and stock exchanges, to assess the situation and review the activities of brokers and other market participants.
Additionally, the agency is investigating restrictions introduced by stock apps and online platforms, which banned retail investors from buying shares in red-hot GameStop and several other troubled companies.
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Congress Plans Hearings on GameStop Pumps
The SEC did not call out Robinhood or any other trading platforms by name, but did note that it will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
The regulatory move comes as political pressure to investigate the GameStop short squeeze saga is intense. The leaders of the House and Senate committees will have hearings into the Reddit-fueled trading saga, as well as looking into retail brokers’ restrictions.
However, identifying specific violations of the securities laws or bringing enforcement actions against millions of amateur investors coordinating their work on social media, will be challenging.
The SEC could ask brokers it regulates to provide so-called ‘blue sheets’ which allows investigators to reveal who traded what and when. Furthermore, ‘blue sheets’ provide critical detailed information about securities transactions, including the security, trade date, price, share quantity, customer name and whether it was a buy, sale or short sale.
In this case, the alleged fraud could be a classic pump and dump scheme and the commission will be going after traders hyping shares of GameStop, BlackBerry, Nokia and other meme stocks.