MANHATTAN (CN) — Retail investors who feasted on GameStop shares the last few days to the detriment of Wall Street giants have caught the eye of lawmakers, regulators and securities attorneys.
The wild swings in the stock price — accomplished by a motley crew of retail investors and online pranksters pumping the value of GameStop — has already spurred popular retail investment platforms like Robinhood to rein in buying, but it could also lead regulators to crack down hard on retail investors.
Regulators could take myriad approaches to the mania, including placing curbs on certain stocks or even temporarily banning short sales on those stocks, said Mike Pagano, a finance professor at Villanova University.
“If this swarm phenomenon continues, then more of these tools can be applied, along with enforcement actions on pump/dump traders and brokers that are shown to be aiding this type of behavior,” Pagano said in an email. “However, I think many regulators are hoping the bubble bursts on its own relatively quickly.”
The last few days have been a wild ride for GameStop, whose share price exploded from $20 per share a few weeks ago to more than $380 as of Wednesday morning. It has not been so good for several large hedge funds that had taken short positions, betting that GameStop’s stock was essentially a bubble and not priced accurately.
Many investment analysts had pegged GameStop as a dinosaur company. Despite rising video game demand in the age of Covid-19 lockdowns, the company operates as a brick-and-mortar, when many game companies are shifting to cloud-based and online game sales.
Message boards and chatrooms drove up intense interest, however, among investors in recent days. Some budding investors have hoped to make a quick buck or wanted to flex their contrarian muscles against the advice of Wall Street investment advisers. Others, though, have used the GameStop fiasco as an opportunity to take pot shots at the “global elite” and sink leveraged hedge funds.
“Stocks such as GameStop usually don’t move markets, but as is almost always the case, fears of contagion are starting to impact the broad market,” Tom Essaye of the Sevens Report wrote in an investor’s note early on Thursday.
He noted that the losses taken by large hedge funds could force liquidation in other parts of the market, leading to a “negative feedback loop” and a full-on pullback in equities.
“Bottom line, the GameStop fiasco has hit investor confidence, and given markets are stretched and investors complacent, it’s making the declines larger than they should be,” Essaye wrote.
The brunt of the GameStop rush was felt heaviest on Wednesday, when the three major U.S. indices saw their worst day in about three months. The Dow finished that day down 2%.
On Thursday, after brokerages installed limits on the company’s stock, the opposite happened: GameStop dropped by about one-third to $230 a share and the Dow finished the day up about 1%.
After the feeding frenzy, the Securities and Exchange Commission on Wednesday issued a statement that it was “actively monitoring the ongoing market volatility” and was “working with our fellow regulators to assess the situation and review the activities of regulated entities, financial institutions, and other market participants.”
Exactly what measures the SEC or other regulators take are up in the air.
“The SEC is very good at this,” said Thomas Gorman, an attorney at Dorsey & Whitney and a former senior counsel at the SEC’s enforcement division. “They’ll get this sorted out.”
Gorman said the agency has a real-time audit trail of who makes trades and are likely scrutinizing chatrooms and message boards looking for fraudulent comments. If, for example, the SEC sees 10,000 shares of GameStop purchased and then five minutes later sold by the same investor, that would be a major red flag, he said.
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