NEW YORK • The United States Securities and Exchange Commission (SEC) waded into the battle between small investors and Wall Street hedge funds, warning brokerages and social media traders it was on alert for any wrongdoing in last week’s roller-coaster trade.

GameStop shares rallied again, awarding retail investors the advantage in the latest round of their week-long slugfest against major financial institutions that had shorted the video game retailer.

The so-called “Reddit rally” has inflated stock prices for GameStop and other previously downtrodden firms that individual investors championed on social media forums such as Reddit’s Wallstreetbets, which has almost six million members.

GameStop surged 68 per cent on Friday after brokerage apps including Robinhood eased some restrictions on trading.

GameStop shares fell on Thursday following the curbs, which drew calls for scrutiny from regulators and outrage from celebrities and politicians on both sides of the political aisle.

Robinhood said late on Friday that opening new positions in 50 securities including GameStop is currently allowed, but limited.

Koss Corp was up 53 per cent, but both the headphone maker and GameStop remained below peaks reached earlier last week.

Hedge funds and other short sellers had a bruising week. GameStop short sellers have endured mark-to-market losses of US$19.75 billion (S$26.2 billion) so far this year, according to S3 Partners.

Even so, the stock remained highly shorted, with US$11.2 billion short interest.

The SEC issued a rare joint statement from its acting chair and commissioners. It said it was working closely with other regulators and stock exchanges “to protect investors and to identify and pursue potential wrongdoing” and would “closely review actions… that may disadvantage investors” or hinder their ability to trade stocks.

The showdown between small traders and professional short sellers also drew scrutiny from lawmakers, the White House and the attorneys-general of New York and Texas.

Texas Attorney-General Ken Paxton issued 13 civil investigative demands, the civil equivalent of a subpoena, on Friday to Robinhood and others that put curbs on stock trading, calling it “shockingly unprecedented and wrong”.

The battle added to uncertainty in equity markets that had looked ripe for a pullback.

Some funds were forced to sell some of their best-performing stocks, including Apple, to cover billions of dollars in losses on short positions.

All three main US indexes suffered their biggest weekly fall since the end of October on Friday, closing down around 2 per cent.

While some companies swept up in the so-called “Reddit rebellion” have used the opportunity to raise capital, most have said little about the volatility in their shares.

GameStop did not reply to multiple requests for comment.

REUTERS