Traders have been warned they could be guilty of market abuse amid a trading frenzy which has pitted ordinary investors against Wall Street.
UK investors should be wary of ‘highly volatile market conditions’, the Financial Conduct Authority (FCA) said, after users on social media site Reddit began pumping up the price of certain stocks to get back at hedge funds and other short-sellers.
The FCA cautioned that traders joining the Reddit crowd in ploughing their money into these stocks could even fall foul of rules on market abuse – if they were found to have artificially inflated the price of a stock.
Users on social media site Reddit are pumping up the price of certain stocks to get back at hedge funds and other short-sellers
The bizarre trading frenzy, which has been branded the ‘French revolution of investing’ by some industry insiders, appears to have begun as a way for disillusioned millennials to get back at the crisp-suited hedge funds who they blame for their financial woes.
They have targeted stocks heavily shorted by hedge funds.
Shorting, or short-selling, is a way for investors to bet against the success of a firm. If the shares go down, the short-sellers make money. If they go up, the short-sellers can suffer heavy losses.
By encouraging each other to buy these shorted companies, users of Reddit and other forums and social media platforms have been pumping up the price and causing hedge funds to bleed money.
While the phenomenon started in the US with a little-known video game retailer called Gamestop, it quickly spread to the UK.
Robinhood stock curbs spark fury
Investors have reacted angrily after some brokers began to curb trading of shares linked to the Reddit frenzy.
Traders using sites and apps such as Robinhood and Trading212 found they were slapped with restrictions when trying to buy stocks, including Gamestop and AMC Entertainment. Both of these stocks have rocketed in value over recent days as traders using social media platform Reddit have banded together to squeeze out short-selling hedge funds.
But amid concerns that some investors could be unwittingly letting themselves in for huge losses, some platforms have clamped down, sending stocks tumbling.
Responding to the curbs, trader Myron Sakkas, 18, who is studying at Warwick University and invested in Gamestop through his Trading212 account, told the BBC: ‘What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money.’
Several lawsuits have been filed against Robinhood in the US.
In one filed in New York, Robinhood user Brendon Nelson said the company removed Gamestop from its trading platform during an ‘unprecedented stock rise’.
In Chicago, user Richard Joseph Gatz said the halt of trading in Blackberry, Nokia and AMC ‘was to protect institutional investment at the detriment of retail customers’.
Trading212 said it was blocking certain trades ‘in the interest of mitigating risk for our clients’.
Heavily shorted companies including Pearson, Cineworld and Hammerson all saw sharp spikes in their share prices this week for no discernible reason.
American Airlines was mentioned on the Reddit thread yesterday, causing its shares to jump as much as 30 per cent at one point. This set off a chain of speculative trading among UK-listed airlines.
Easyjet climbed 4.6 per cent despite a dire trading update, while Wizz Air was up 4.7 per cent after posting hefty losses and British Airways-owner IAG jumped 4.8 per cent.
A spokesman for the City watchdog said: ‘UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking.
‘Firms and individuals should also ensure they are familiar with, and abiding by, all regulations including the market abuse and short-selling regimes in the jurisdiction they are trading in.’
US regulators are also wary. President Joe Biden’s economic team are said to be ‘monitoring the situation’.
And Nasdaq chief executive Adena Friedman warned that the stock exchange operator could start an investigation if a ‘significant rise in the chatter on social media’ corresponded with ‘unusual trading activity’.
The Reddit-led phenomenon has emerged after years of frustration among younger generations with the status quo of the financial system.
One Reddit user posted: ‘I was in my early teens during the ’08 crisis. I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life.’
And while the trend may have started among day traders with an axe to grind, normal savers were soon piling in to take advantage of the rising share prices.
Gamestop has been the most-traded stock over the past week on Hargreaves Lansdown, Britain’s largest investment platform for savers.
The perils of this became clear yesterday – shares in Gamestop, which had rocketed more than 1,700 per cent since the beginning of the year, fell back 32 per cent, causing pain for anyone who bought in at the top.
Susannah Streeter, senior analyst at Hargreaves Lansdown, said: ‘People really risk getting their fingers burnt.’
But Justin Urquhart Stewart, co-founder of investment firm 7IM, said: ‘I think this is great – it’s a real kick in the shorts for the hedge funds who have had it their own way for years.’
SIMON LAMBERT: GameStop – should watchdogs bark or stay out?
GameStop has landed an anwkward question on financial regulators’ plates.
A debate is raging – albeit far slower than the story is unfolding – as to whether the US financial regulator the SEC should step in, or whether the little guys and girls getting together to take on the hedge fund big shots is something it should keep its nose out of.
The FCA will also have been furiously debating behind closed doors what it should do if the fever spreads to the UK.
Fuel was added to the fire when US free trading app RobinHood, which has facilitated much of the GameStop buying frenzy, stopped its customers buying in yesterday.
That triggered the bizarre sight of left wing politician Alexandria Ocasio-Cortez tweeting to support the right of small investors to punt their savings on a wildly-overvalued stock using high risk financial derivatives.
It also led to claims of a corrupt financial system trying to crush ordinary people rebelling against it and incorrect claims about the links between some of the players involved.
Posts claimed that Citadel owned RobinHood and had stopped customers buying GameStop as it also had a stake in short selling hedge fund target Melvin.
In reality, RobinHood is privately owned by its founder and venture capital firm; Citadel does not own RobinHood but does do business with it by paying RobinHood for order flow – this gives it a heads up on what’s being bought and sold, which it uses as an edge for its own trading, and pays for RobinHood customers free trading; and Citadel took a stake in Melvin at most likely fire sale prices after it had suffered big losses in its GameStop short selling battle.
As with anything in finance, relationships are tangled and reality is far more complex than the simple narrative being spun of Wall Street big guns crushing the little people.
In fact, other than the few hedge funds that have lost out, most of Wall Street is probably making more money off the back of the GameStop etc escapades, due to massive trading volume.
On the surface, GameStop is an amusing stock market story at a time when we all need a laugh: if people want to get involved in daft greater fool momentum trading – knowing that if they end up being the last fool they will lose money – then so be it.
But underlying it is a huge speculative bubble in shares and high-risk option trading, and from tulips, to the 1920s, and the dot com era, ultimately it’s the individual investors who always lose the most when those bubbles burst.
The financial watchdogs know this and while as a financial commentator yesterday, I could simply write ‘Caveat Emptor’ on GameStop, the regulators have the much tougher task of working out what if anything they do.
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