The Securities and Exchange Commission (SEC) said it is monitoring and evaluating the “extreme price volatility” of certain securities, as day traders and retail investors push the price of micro-cap companies like GameStop and AMC Entertainment to record highs.
“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,” Acting Chair Allison Herren Lee and Commissioners Hester Peirce and Elad Roisman said in a joint statement.
The moves came after trading platforms Robinhood, Interactive Brokers, and TD Ameritrade restricted trading and raised margin requirements for these stocks and others, including Blackberry, Bed Bath and Beyond, and Koss Corp. Robinhood has since lightened the restrictions, allowing for “limited buys of these securities,” after facing criticism and a lawsuit for stopping retail investors from trading, while hedge funds continue to have the opportunity.
The unprecedented volume of trading was prompted by a new class of retail investors and day traders that have flooded the market since the beginning of the pandemic, engaging in a buying boom as they chase struggling stocks. Online forums like Reddit's WallStreetBets have become a place for these new day traders to discuss the stocks.
The trading frenzy led to several broker outages Wednesday, and several of the stocks, including GameStop and AMC, experienced trading halts throughout the week.
“As always, the Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation,” the SEC said, noting that it is working closely with other regulators, such as FINRA, to ensure market watchdogs protect investors by pursuing potential wrongdoing. Specifically, the SEC said it will review the brokers’ decisions to inhibit trading as well as warned investors to avoid “abusive or manipulative trading activity that is prohibited by the federal securities laws.”
Short selling hedge funds betting against these micro-cap stocks have lost billions of dollars so far. As shares of GameStop soared on retail investor-fueled euphoria, short sellers who were faced with mounting losses and high borrowing fees were forced to close their positions and buy, prompting what is known as a short squeeze.
Sen. Elizabeth Warren (D-MA) blamed the SEC’s failure to act for the multi-day frenzy 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,” she said. “To have a healthy stock market, you’ve got to have a cop on the beat.”
Other politicians, including Ted Cruz (R-TX) and Rep. Alexandra Ocasio-Cortez (D-NY), also called for more regulation and oversight.
Shares in GameStop jumped 75% at 10:50 a.m. Friday, while shares in AMC popped 60%.