Elizabeth Warren Demands SEC Response To GameStop Frenzy After It Vows To Protect Retail Traders From ‘Abusive Or Manipulative’ Activity

Topline

As calls heighten for regulators to investigate the retail trading frenzy–and resulting market madness–spurred by Reddit users this week, Sen. Elizabeth Warren (D-Mass.) is urging the Securities and Exchange Commission, which regulates the stock market, to provide specific details about its investigatory steps–hours after the agency issued a vague statement saying it was still “closely monitoring” the recent market volatility.

Key Facts

In a five-page letter to the agency Friday morning, Warren questioned whether the “wild” price swings in meme stocks such as GameStop presented “any systemic concerns for financial systems” and requested the agency publicly respond to an accompanying list of questions by Friday, February 5.

The senator also asked whether online message boards, such as those on Reddit, or other social media, helped users violate existing securities laws and asked what steps the SEC will take to update its definition of “market manipulation,” alluding to online speculation that there was coordination among market gatekeepers in the temporary restrictions placed on meme stocks Thursday.

The note comes hours after the SEC said it is still “closely monitoring” and evaluating the “extreme price volatility of certain stocks’ trading prices” in recent days, not naming but obviously referring to the meme stocks like GameStop, AMC Entertainment and BlackBerry that have shot up this week and rattled the broader market.

The agency also said it is working with other regulators, including FINRA and the self-regulatory stock exchanges, to “identify and pursue potential wrongdoing.”

In comments that seemed to clearly target online brokerages, the agency said it will “closely review” actions by “regulated entities” that may have disadvantaged investors or “unduly inhibited” their ability to trade certain securities before vowing to “protect retail investors” from illegal and manipulative trading activity.

Amid the frenzy Wednesday, one Massachusetts regulator told Barron’s that the New York Stock Exchange, which has temporarily halted trading in specific stocks several times this week, should “consider simply suspending” GamesStop trading for one month, adding that “these small and unsophisticated investors are probably going to get hurt by this.”

Crucial Quote 

“These wild fluctuations are just the latest indication that many private equity firms, hedge funds and other investors–big and small–are treating the stock market like a casino, giving little consideration to the companies, communities, workers and consumers that may be affected by these risky bets,” Warren wrote Friday. “The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company’s workers, consumers or the broader economy.”

Key Background

Robinhood has been hit with multiple class-action lawsuits related to the trading mayhem. One lawsuit–filed in a New York federal court–alleges the brokerage “abruptly, purposefully, willfully, and knowingly” halted purchases of GameStop to slow its price growth and to deprive traders of the ability to invest in it. The suit further alleged that Robinhood’s actions were “purposefully and knowingly” undertaken “to manipulate the market.” Due to the extraordinarily high number of trades–and the associated costs, Robinhood was forced to raise $1 billion in emergency funds from investors and hundreds of millions of dollars more in credit lines this week

What To Watch For

Robinhood’s decision to restrict meme-stock trading also provoked a response from other lawmakers including Rep. Alexandria Ocasio-Cortez (D-N.Y.), who called it “unacceptable” in a tweet Thursday before pledging to support a hearing by the Financials Services Committee on which she sits. 

Further Reading

Robinhood Faces Anger, Class-Action Suits And Political Pushback After Curbing Trade Of GameStop (Forbes)Robinhood Stops Trading In Meme Stocks GameStop, AMC As Reddit Rally Begins To Unravel (Forbes)

Meme Stocks Begin To Crumble: GameStop Market Value Falls $14 Billion, AMC Crashes 55% While Dow Jumps 600 Points (Forbes)

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