Senator Elizabeth Warren has sent a letter to the US Securities and Exchange Commission demanding answers to several questions regarding the heightened volatility pertaining to the recent short-squeezes ostensibly created by Redditors focusing on hedge funds with heavy short positions.
Senator Warren said the price changes are not tied to any fundamental changes in the companies in question.
In brief, Warren asks the Commission to answer the following questions:
1. What were the causes of the recent dramatic shifts in GameStop share prices? Did these shifts represent a “fair, orderly, and efficient” market function?
a. Did the sharp rise in GameStop’s share reflect changes in the company’s fundamental value? If not, what drove these changes of GameStop share prices?
i. To what extent did large investors, such as hedge funds like Melvin Capital Management, and their short positions impact the fluctuation of GameStop’s share prices? Did any of these practices violate existing securities laws?
ii. To what extent did online message boards, such those on Reddit, or broader social media amplification impact the fluctuation of GameStop’s prices? Did any of these practices violate existing securities laws?
2. Do the wild swings in value of GameStop and other companies affected by similar trading schemes present any systemic concerns for financial systems or the stock market?
3. What steps will the SEC take to ensure that securities markets better reflect prices that are in line with the intrinsic and fundamental value of underlying companies?
a. Please describe the impacts of disorderly, inefficient, and unfair prices in securities markets on communities, consumers, workers, and investors.
4. What steps will the SEC take to update and implement rules defining market manipulation? Please provide a detailed timeline.
a. Please describe any gaps in the SEC’s current regulatory regime in addressing market manipulation.
b. Please describe any gaps in the SEC’s current enforcement practices or capabilities to address market manipulation.
While Warren declares she is looking out for “working families that continue to suffer,” her objective is not quite clear beyond bashing the regulatory system and how markets operate which are to match buyers with sellers. One of the main subreddits, Wallstreetbets, is largely populated by retail investors – or “ordinary Joes” that have concocted a trading strategy that is working (for now). Wallstreetbets has more than doubled its members since the phenomenon started and now stands at over 8 million users (or degenerates as they are called).
Amber Ghaddar, founder of AllianceBlock, a globally compliant decentralized capital market, notes that daytraders have been around for some time:
“Day-traders have become a force to be reckoned with, and they are here to stay. WallStreetBets is strongly reminiscent of the crypto community’s subreddit and Telegram chats where community-driven investments are king. What’s really interesting, is that this trend that started in crypto in 2016/2017 has actually moved to the equity market with day traders.”
While the heady days of ICOs ended with a thud, the Redditors are now trading on highly regulated securities markets and it does not appear they are doing anything wrong (unlike ICOs that were mainly unregistered securities).
Many pundits on Twitter have embraced the populist trading that is taking place. and some have slammed Senator Warren’s statements as misguided.
Hardscrabble voice of the little folks against Wall Street demands to know who’s responsible for <checks notes> fucking up a hedge fund shorthttps://t.co/152A8UKIEb
— David Burge (@iowahawkblog) January 29, 2021
Katie Pavlich, a frequent commentator on television slammed Senator Warren as a “total fraud.”
Again, this woman is a total fraud. She’s going after the Reddit traders. https://t.co/m46dhuBeGX
— Katie Pavlich (@KatiePavlich) January 29, 2021
The Intercept took the opportunity to slander Fintech as “insidious” hammering Robinhood’s “faux populist marketing.”
Meanwhile, US markets always have a tendency to reset, when necessary, and remain the most robust in the world as well as being accessible to retail investors. Recent improvements to the exempt offering ecosystem have also helped boost access to smaller investors.
Robinhood Reddit 01.29.2021 Letter from Senator Warren to Acting Chair Lee