Hedge funds, retail investors, and their stockbrokers are bracing themselves for tighter regulation of US markets. Officials are expected to meet this week to assess the aftermath of a social media-fueled trading frenzy that has rattled stocks and silver prices.
The bulk buying by amateur retailers over the past two weeks has spiked the price of companies betted by major US fund managers, including video game retailer GameStop and cinema operator AMC Entertainment.
With their brokers imposing buying restrictions, small traders’ favorite stocks have fallen for two days in a row. Early trading in their Europe-listed stocks on Wednesday will be the next clue as to whether they are in free fall, just like regulators.
GameStop stock is down 80 percent from its high a week ago, while AMC Entertainment stock is down 60 percent. The shares had gained 2300 percent and 800 percent since mid-January, which was due to contributions in the popular Reddit forum WallStreetBets.
Silver, which rose briefly on Monday when small traders bought the metal, remained about 10 percent below its recent high.
« The settlement is obvious, » said Oriano Lizza, premium trader at CMC Markets in Singapore. But he added that it would be easy for nimble small investors to regroup and target new businesses.
« I think from a regulatory perspective there is concern that they might continue to do this, » he said.
The head of the U.S. Securities and Exchange Commission, which regulates the markets, will meet with Treasury Security Janet Yellen and heads of the Federal Reserve and Commodity Futures Trading Commission as early as Thursday, a tax official told Reuters.
Yellen has asked to discuss recent volatility and whether trading is compatible with fair and efficient markets.
It’s not clear if this will lead to action, but experts believe that focus will also fall on the growing role of non-bank companies like hedge funds in financial markets and small traders bracing themselves for a showdown.
« Final boss fight. It happens tomorrow with Yellen, SEC and Federal Reserve, » read a Wednesday post on Reddit. « They will either try to stop the party or they will look for money to pay us and not crash everything at the same time. »
Retail investor participation in the stock markets has skyrocketed over the past year as pandemic freezes, volatility, and economic stimulus payments have sparked global insanity in day trading.
The phenomenon has propelled stock indices from New York to Seoul to record highs, pushing the price of assets from cryptocurrencies to new listings.
The attack on GameStop short sellers took it to a new level, as small traders apparently acted together when organizing the purchase on Reddit. Contributions encouraging buying silver also raised prices on Monday, although this was short-lived.
« The power of the retail investor is there, » said Chris Brankin, CEO of TD Ameritrade in Singapore.
« We could see other similar events more regularly, but be sure that regulators will try to contain any market (volatility) or manipulation, » he said.
Melvin Capital, one of the largest funds betting on GameStop’s share price decline, lost 53 percent in January. Others, like billionaire Steven Cohen’s Point72 Asset Management, lost nearly 9 percent.
Online broker Robinhood has also come under pressure and has struggled to raise more than $ 3 billion in a week to meet funding needs resulting from the trading boom.
Robinhood eased some of its trading restrictions further on Tuesday, increasing the purchase limits for GameStop shares from 20 to 100 shares, for example.
GameStop shares listed in Frankfurt will start trading at 07:00 GMT and will open for US pre-market trading at 09:00 GMT.