WASHINGTON (AFP, REUTERS) – Progressive US senators Bernie Sanders and Elizabeth Warren called on Sunday (Jan 31) for action against what they said were the Wall Street abuses by hedge funds revealed by the recent frenzy over GameStop shares.
“We need an SEC investigation,” Ms Warren told CNN, referring to the federal Securities and Exchange Commission.
“What’s happening with GameStop is just a reminder of what’s been going on on Wall Street now for years,” the Democratic senator said.
“It’s a rigged game, and it’s been a set of players who come in and manipulate the market.”
Amateur investors who organised over Reddit and other online forums have in recent days targeted shares of companies including GameStop that had been “short-sold” by hedge funds in a bet that the price of the shares would fall.
The Reddit group’s tactics caused massive spikes in share prices.
The SEC said on Friday that it was “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices” and would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited” by federal law.
But Ms Warren called for more decisive action.
“It is time for the SEC to get off their duffs and do their jobs,” said Ms Warren, whose national profile rose when she led a push for tougher financial regulations following the meltdown of 2007-2008.
“We need more regulation about market manipulation.”
Independent senator Bernie Sanders was similarly critical.
“I have long believed that the business model of Wall Street is flawed,” he told ABC’s This Week. “We have to take a very hard look at the kind of illegal activities and outrageous behaviour on the part of the hedge funds and other Wall Street players.”
Shares in GameStop, a major video game retailer that has been financially ailing, soared during the Reddit group’s massive buying initiative – mounted in protest against the hedge funds’ betting on GameStop’s demise.
To cover their losses, the hedge funds had to buy back, at higher prices, shares they had sold.
Brian Deese, a top economic advisor to President Joe Biden, said on Sunday that the SEC was “focused on understanding fully what happened here.” “We’re going to look at those issues and certainly understand fully this particular episode and the broader questions there,” he told CNN.
But he said the new administration was concentrating first on alleviating the economic pain flowing from the Covid-19 pandemic.
“Our immediate focus here is on taking the action we need to put a floor under this economic crisis.”
Wall Street, meanwhile, is gearing up for another week of market mayhem, with signs that the retail frenzy that pumped up the stock prices of GameStop and AMC Entertainment Holdings is spreading to other assets.
Some of Wall Street’s largest hedge funds are still licking their wounds after retail traders sought to drive up the prices of stocks that were heavily bet against, resulting in large losses for major investors.
Melvin Capital, a hedge fund at the center of the GameStop drama, lost 53 per cent in January but received commitments for fresh cash from investors in the last days of the month, Reuters reported on Sunday.
Melvin ended January with more than US$8 billion (S$10.6 billion) in assets after having started the year with roughly US$12.5 billion in assets, according to a person familiar with the matter.
On Friday, Citron Research’s Andrew Left, who spent two decades building his brand as one of the world’s best-known short-sellers, turned his back on publicly detailing companies’ shortcomings, following an intense backlash against him and others who said video retailer GameStop’s stock was not worth its price.
“We saw the might of a new investor base, in terms of their ability to shape not just the fortunes of an individual stock but the fortunes of a large market segment like the Russell 2000,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.
Amid the wild price fluctuations, the amount of position covering last week by US hedge funds, buying and selling, was the highest since the financial crisis more than a decade ago, according to an analysis by Goldman Sachs. Nevertheless, their market exposure to stocks is still near record levels, the investment bank warned.
“According to Goldman Sachs Prime Services, this week represented the largest active hedge fund de-grossing since February 2009. Funds in their coverage sold long positions and covered shorts in every sector,” the investment bank wrote in a note late on Friday.
“Despite this active deleveraging, hedge fund net and gross exposures on a mark-to-market basis both remain close to the highest levels on record, indicating ongoing risk of positioning-driven sell-offs.”
Signs are mounting that retail traders who moved the market last week are setting their sights further afield than just US stocks.
On Thursday and Friday, the price of silver rallied, taking gains to around 10 per cent since messages began to circulate on social media platform Reddit urging retail investors to pile into the market and drive up prices. The price of gold has also rallied.
Such market moves have brought into focus the growing heft that retail traders have on financial markets, which had been dominated in the past by larger institutions.
“What’s been surprising in the last few months has been the scale of retail participation has started to move the dials,” said Paul O’Connor, head of the multi-asset team at Janus Henderson in London.
“If you looked at that data a couple of months ago, you can see it’s been happening. It’s not like these guys woke up last week,” Mr O’Connor added.