The chaos in the stock market, caused by the battle between young, aggressive, novice day traders and experienced, wealthy hedge fund professionals, along with fast-growing trading app Robinhood abruptly denying or limiting the purchase of certain stocks, has lit a fire under U.S. regulators.
Janet Yellen, President Joe Biden’s newly installed Treasury Secretary, “called for a meeting with top financial regulators to discuss recent volatility in financial markets related to GameStop” and other “meme stonks” (yeah, that’s the inside-term used) to find out what is happening.
Yellen, whose responsibilities include overseeing the nation’s banks, chairs a council of regulators that monitor financial stability risks. She requested a meeting with top officials at the major regulatory agencies, including the Securities and Exchange Commission (SEC), the Federal Reserve, the New York Fed and the Commodity Futures Trading Commission.
A spokesperson for the Treasury said, “Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets.”
The conversation will be centered around the questionable trading activities that took place over the last few months. There have been a host of allegations concerning market manipulation, pump-and-dump schemes and other possible violations of securities rules and regulations. There are also questions surrounding Robinhood’s seemingly capricious decision to stop buy orders in the story stocks of GameStop, AMC Entertainment and others.
Separately, in a blistering interview with CNN, Senator Elizabeth Warren was incensed over the trading activities last week, saying the market “is a rigged game.” Warren boldly called out the SEC, the premiere Wall Street regulator, admonishing the agency “to grow a backbone” and “get off their duffs and do their jobs.”
Warren said, “We need more regulation about market manipulation.” She also decried the practices of “pump and dumps” and stock buybacks that enrich the CEOs and executives. The senator added, “The SEC needs a broader look at how hedge funds and corporations manipulate the market.”
In an effort to push the SEC into action, Warren sent a letter to Allison Herren Lee, the acting chair of the SEC. She wrote, “I am deeply concerned that these casino-like swings in the value of GameStop and other company shares are yet another example of the gamesmanship that interferes with the ‘fair, orderly, and efficient’ function of the market.”
Warren demanded to know what the SEC was doing to address market manipulation—relative to the incredible run-ups in the stock prices of a number of companies touted by members of the r/wallstreetbets subreddit. She asserted the spikes in value are “raising obvious questions about public confidence in the market and those trading in it.”
In response, the SEC said “We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets. We are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”
"we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants." https://t.co/P3IMlwB62h (2/2)
— SEC (@SECGov) January 27, 2021
The regulator also asserted, “The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities. In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity.”
The incoming chair of the Senate Banking Committee, Democratic Senator Sherrod Brown, along with longstanding chair of the House Financial ServicesCommittee, Maxine Waters, promised to hold hearings on this important matter. Alexandria Ocasio-Cortez, a member of the Financial Services Committee, said she supports holding a hearing to find out why Robinhood made the decision to “block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”
Lawmakers on Capitol Hill have already started proposing legislation to restrict short selling and introducing financial transactions taxes. Jen Psaki, the White House press secretary, said the SEC is reviewing and monitoring the situation and “There is an important set of policy issues that have been raised as a result of market volatility in recent days, and we think congressional attention to these issues is appropriate.”
The harsh spotlight placed upon the questionable activities could lead to tougher SEC rules relating to brokerage firms capital requirements, social media-driven, crowd-sourced pile-on investing and hedge fund tactics, including short selling.