November 28, 2021

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SEC reviewing GameStop frenzy, vows to protect retail investors

The U.S. Securities and Exchange Commission in Washington, D.C.

Adam Jeffery | CNBC

The Securities and Exchange Commission said Friday it will work to protect investors by reviewing the recent trading volatility that has fueled a meteoric rise in stocks like GameStop and AMC Entertainment.

In a statement, the nation’s top financial regulator vowed to protect individual traders and to scrutinize actions taken by brokerages that may “disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

“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 SEC said.

“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.”

The statement came as heavily shorted, high-flying equities soared yet again during Friday’s session. Video game retailer GameStop, theater operator AMC and headphone maker Koss rallied 50%, 53% and 43%, respectively.

The SEC’s pledge to clamp down on brokerages that may have “unduly” limited customers’ ability to trade likely comes as good news to members of WallStreetBets Reddit and other retail traders who helped spark the rally.

By buying the heavily shorted equities or their call options, retail investors have forced investors betting against the stock, known as short sellers, to cover their positions by buying back shares in an effort prevent further losses.

When this happen en masse, it is called a “short squeeze” and can lead to a dramatic, volatile rise in a stock’s 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 heavy trading volumes put pressure on online brokerages like Robinhood, which are required to pay customers cash when they close a position. The brokerages also needed additional cash to supply their clearing facility with additional capital to protect trading partners from outsized losses.

Robinhood later said it would allow limited buying in the 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 violent swings in such stocks, as well as Robinhood’s decision to restrict trading, has drawn the ire of politicians on both sides of the political aisle.

Sen. Elizabeth Warren told CNBC on Thursday that she blamed the SEC’s failure to act for the dayslong blitz of market speculation.

“We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules,” the Massachusetts Democrat said. “To have a healthy stock market, you’ve got to have a cop on the beat.”

A pedestrian walks past a GameStop Corp. store in Rome, Italy, on Thursday, Jan. 28, 2021.

Alessia Pierdomenico | Bloomberg | Getty Images

“That should be the SEC,” she added. “They need to step up and do their job.”

Rep. Patrick McHenry of North Carolina, the ranking Republican on the House Financial Services Committee, said Friday he is worried about unequal access to the capital markets.

I want “to ensure that we’re not cutting people off from additional access to markets and therefore leaving them to activities like we’ve seen with GameStop and a few other tradable securities,” he said on “Squawk Box.”

“What I’m seeing here is this larger case, which is: Average, everyday investors are cut off from the access that insiders like C-suite members of companies, and hedge funds and private equity naturally get,” he added. “And that the credit-investor standard has bifurcated our markets into a highly prosperous lie.”

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