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 Securities and Exchange Commission (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.”
Casino-like swings in stock prices of GameStop reflect wild levels of speculation that don’t help GameStop’s workers or customers and could lead to market instability. Today I told the SEC to explain what exactly it's doing to prevent market manipulation. https://t.co/NWaZe1jFVb pic.twitter.com/MAbjHcq47i— Elizabeth Warren (@SenWarren) January 29, 2021
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 is 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.”
Warren, a member of the Senate Banking Committee and an avowed critic of the practices on Wall Street, told the SEC to take action “to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders.“ She ominously gave a deadline of Feb. 5 to come up with solutions to “improve its enforcement capabilities”—or else.
In a statement released earlier Friday, the SEC said it’s “closely monitoring the extreme price volatility of certain stocks’ trading prices over the past several days.” To be fair, with the new administration of President Joe Biden, the SEC, similar to other government agencies, is in the midst of transitioning from Donald Trump’s appointees to Biden’s choices. Former SEC chief, Jay Clayton, has departed and the new incumbent chair, Gary Gensler, will be starting.
In addition to the army of mostly novice day traders, Warren set her sights on the short-selling hedge funds, whose goal was to see the stock prices of targeted companies dramatically plummet in value, so that they could reap substantial profits. These corporations could end up seeking bankruptcy protection and be forced to fire thousands of workers who will end up in one of the worst jobs markets in modern history.
For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price.— Elizabeth Warren (@SenWarren) January 27, 2021
In back-to-back tweets, 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 stage is being set for some dramatic changes in regulation over Wall Street. The recent trading activities, while characterized as the “good, young kids against the evil hedge fund and Wall Street-entrenched establishment,” the reality is the battle highlighted serious fundamental, underlying issues.
Were the over 5 million members of the subreddit colluding together, along with others on social media, to drive the prices higher for their own profits and to the detriment of those who were the last to buy at the record levels? How could hedge funds sell more than 100% of a company’s shares short? Naked short selling is prohibited, but did it occur? Do online brokerages, such as Robinhood, have sufficient capital to weather unforeseeable spikes in trading of volatile securities?
The trading platform app needed to raise billions of dollars to meet net capital requirements. Last week, Robinhood restricted trading in the go-to stocks of the day traders, which brought about a number of lawsuits.
It’s clear, as Warren pointed out, the U.S. securities markets need to make some serious changes. In the short term, it may impact the bottom line of brokerage firms, as they’ll need to hire more compliance, legal, audit, risk, anti-money laundering and regulatory professionals, enact new internal rules and regulations and implement technologies.
In the long run, it would serve everyone better by making the markets fair, transparent and honest with experienced professionals to watch over it.