At the end of January, media and market participants watched in amazement as a drama unfolded, featuring Reddit, an ailing video game shop, and million dollar losses for hedge fund managers. In a nutshell, investors on a Reddit subforum r/WallStreetBets noted that many hedge funds were betting that the shares of a failing U.S. computer games retailer GameStop would fall. They came together to buy GameStop shares, reasoning that their actions would push the price up, squeezing the short positions of hedge funds that borrow shares from long-term investors. The resulting trading frenzy was exacerbated by many U.S. retail investors buying call options on GameStop, forcing the investment banks that sold the derivatives to buy shares to cover their positions too. GameStop’s share price rocketed more than fourfold within three days. The trend spread, as investors turned to other heavily-shorted stocks, including U.S. cinema operator, AMC, Blackberry and Bed Bath & Beyond, until Robinhood and other popular retail brokers restricted trading in these stocks, sending the prices of the trending stocks plummeting.
Market participants looked to regulatory authorities for comment. The SEC confirmed that it was investigating whether the Reddit users were unlawfully manipulating the price of GameStop shares as well as whether brokers had complied with regulatory obligations and provided consistent risk disclosure. In the U.K. and the E.U., the provisions of the Market Abuse Regulation (MAR) apply and it is interesting to consider whether this would make a substantive difference were a similar fact pattern to arise. In any event, more blatant abuse in the future is not beyond the realm of possibility and the anonymity offered by social media could offer cover for collusion on such platforms to secure a dominant position in the market, which would be considered market abuse under MAR.
Whether or not any supervisory or enforcement action is taken, it is possible that these events trigger changes to market conduct laws that were designed before chat forums and commission-free trading became commonplace. The FMLC held a webinar to consider these topical questions.
A recording of the panellists’ prepared remarks is available to view for a limited period of time. The Q&A that followed was held under Chatham House rules and not recorded.
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