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Wednesday, February 03, 2021, 16:44
US regulators to meet as brokers curb Reddit-trader mania
By Reuters
Wednesday, February 03, 2021, 16:44 By Reuters

In this May 7, 2020 file photo, a GameStop store is seen in St. Louis. Two hedge funds are bowing out of their short positions on the money-losing video game retailer. (JEFF ROBERSON / AP)

SINGAPORE - Hedge funds, small investors and their stockbrokers are bracing for tougher US markets regulation, with officials expected to meet this week to assess the fallout from a social-media driven trading frenzy that has roiled stocks and silver prices.

Mass buying by amateur traders over the past two weeks has driven wild price gyrations in companies that big US fund managers had bet against, including videogame retailer GameStop and cinema operator AMC Entertainment.

As their brokers have imposed buying curbs, small traders’ darling stocks have tumbled for two days running. Early trade in their Europe-listed shares on Wednesday will be the next guide as to whether they are in freefall just as regulators circle.

GameStop shares have fallen 80 percent from a peak a week ago, while AMC Entertainment stock has shed 60 percent. The stocks had gained as much as 2,300 percent and 800 percent respectively since mid-January, fuelled by posts on the popular Reddit forum WallStreetBets.

It is not clear if it will 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 the financial markets and small traders are bracing for a showdown

Silver, which briefly surged on Monday as small traders bought up the metal, steadied about 10 percent below its recent peak.

“The unwind is obvious,” said Oriano Lizza, premium sales trader at brokerage CMC Markets in Singapore. But he added that it would be easy for nimble small investors to regroup and target fresh companies.

“I think from a regulatory standpoint the concern is that they could continue to do this,” he said.

ALSO READ: GameStop's plunge erases US$11 billion as brokers curb trades

The head of the US Securities and Exchange Commission, which regulates markets, will meet with Treasury Security Janet Yellen and the heads of the Federal Reserve and the Commodity Futures Trading Commission as soon as Thursday, a Treasury official told Reuters.

Yellen has asked to discuss recent volatility and whether trade has been consistent with fair and efficient markets.

It is not clear if it will 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 the financial markets and small traders are bracing for a showdown.

“Final boss fight. It’s happening tomorrow with Yellen, SEC and Federal Reserve,” read one Wednesday 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.”

Retail mania

Small investors’ participation in stockmarkets has exploded over the past year as pandemic lockdowns, volatility and stimulus payments have driven a worldwide day-trading craze.

The phenomenon has pushed equity indexes from New York to Seoul to record heights and boosted the price of assets from cyptocurrencies to new stock market listings.

The assault on GameStop short-sellers took it to a new level as small traders appeared to act in concert as they organized buying over Reddit. Posts encouraging silver buying also boosted prices on Monday, although that proved shortlived.

“The power of the retail investor exists,” said Chris Brankin, CEO at TD Ameritrade in Singapore.

“We could see other similar events more regularly, but be sure the regulators will look to curb any market (volatility) or manipulation,” he said.

In the washup, Melvin Capital, one of the biggest funds betting on a drop in GameStop’s share price, lost 53 percent in January. Others, such as billionaire investor Steven Cohen’s Point72 Asset Management lost nearly 9 percent, investors said.

Online broker Robinhood has also come under pressure and has scrambled to raise more than US$3 billion in a week as it races to meet funding neets stemming from the trading boom.

Robinhood further relaxed some of its restrictions on trade on Tuesday, increasing buying limits on GameStop stock, for example, from 20 shares to 100 shares.

READ MORE: GameStop mania goes global as retail traders gang up on shorts

Frankfurt listed GameStop shares begin trading at 0700 GMT and they open for US pre-market trade at 0900 GMT.

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