A trading frenzy fuelled by users of Reddit and other social forums cooled yesterday as the new US Treasury Secretary Janet Yellen called a meeting of top officials that could result in tougher markets regulation for hedge funds, small investors and stockbrokers.
Mass buying by amateur traders over the past two weeks has driven wild price gyrations in companies that US fund managers had bet against, including videogame retailer GameStop and cinema operator AMC Entertainment.
GameStop’s US-listed shares, which soared as high as $483 last week, fuelled by a series of posts on the popular Reddit group WallStreetBets, retreated this week to $90 as fee-free broker apps including the controversial Robinhood imposed buying curbs.
Silver, which briefly surged on Monday as small traders bought up the metal, steadied about 10% below its recent peak.
“The unwind is obvious,” said Oriano Lizza, at brokerage CMC Markets in Singapore, adding that it would be easy for small investors to regroup and target other companies.
“I think from a regulatory standpoint, the concern is that they could continue to do this,” he said.
The head of the SEC in the US, which regulates markets, will meet with Yellen and the heads of the Federal Reserve and the Commodity Futures Trading Commission, possibly as soon as Thursday, a Treasury official told journalists at our partner news agency Reuters.
Janet Yellen, who has allegedly taken millions of Dollars in money from hedge funds for speaking gigs over the years has asked to discuss recent volatility and whether trade has been consistent with fair and efficient markets.
It was not clear if a meeting could result in action, but experts expect focus to also fall on the ever-larger role played by non-bank firms such as hedge funds in financial markets, while small traders are bracing for a showdown.
“Final boss fight. It’s happening tomorrow with Yellen, SEC and Federal Reserve,” read one post on Reddit.
“They are either going to try and stop the party or they are looking for money to pay us and not crash everything at the same time.”
Robinhood said on Wednesday it would allow buying of fractional shares in GameStop and AMC, five days after restricting the practice that has encouraged smaller traders by reducing the size of the amount they have to invest.
Small investors’ participation in stock markets has exploded over the past year, but the gambling sparked by a combination of pandemic lockdowns, volatility and stimulus payments comes with high risks that regulators may want to quell.
Still, there have been no clear signals on what form any official action could take, with potential targets ranging from retail brokers’ capital requirements to questioning the fee-free brokerage model that has encouraged much of the trade.
The benchmark S&P 500, meanwhile, has continued to grind higher this week and the CBOE volatility index has fallen for three straight days as analysts said the Reddit action appeared to be constrained to a handful of stocks rather than spilling over to the broader US stock market.
“There isn’t much of a worry that this is a signal that could destabilize the whole system,” said Simona Gambarini, markets economist at Capital Economics.
“If monetary and fiscal policy remains supportive and the economy recovers from the pandemic with the help of vaccines then equities could go up quite a bit more.”
Some investors may also be turning to “put options”, which are often used to protect against losses or position for declines in a stock’s price, as an alternative to shorting the stock, analysts say.
Demand to borrow GameStop shares has subsided significantly in recent weeks but remains high overall, making it relatively expensive to short the stock.
Online broker Robinhood has also come under pressure and has scrambled to raise more than $3 billion in a week as it races to meet funding needs stemming from the trading boom.
Robinhood further relaxed some of its restrictions on trade on Tuesday, increasing buying limits on GameStop stock from 20 shares to 100 shares.
“The enthusiasm for this unique situation is waning but we’ll continue to see people focused on what the retail investor as a flash mob can accomplish,” said James Gellert, CEO of RapidRatings, which assesses the financial health of companies.
The team at Platform Executive hope you have enjoyed this news article. Translation from English to other languages via Google Cloud Translation. Initial reporting via our official content partners at Thomson Reuters. Reporting by Tom Westbrook in Singapore and Sagarika Jaisinghani in Bengaluru. Additional reporting by April Joyner, Saqib Iqbal Ahmed in New York and Susan Mathew in Bengaluru. Editing by Vidya Ranganathan, Jane Wardell and Bernard Orr.
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