Last week saw an extraordinary surge in the price of GameStop Corp. (NYSE: GME), and attendant volatility and volume, that has impacted investment managers, broker-dealers, and retail investors alike. GME opened the week at less than $100 per share. On Tuesday, shares traded at more than $350. On Thursday, GME pushed past $450 per share before Robinhood and other retail trading platforms blocked investors from opening new positions in the stock (and other stocks experiencing similar activity), causing the price to plunge. By Friday, the situation had drawn the attention of multiple lawmakers, the SEC’s four Commissioners released a joint statement1 on the situation, Robinhood was sued by its users, and GME rebounded, closing the week at $325 per share.
The popular narrative that has been reported in the press is that retail investors have coordinated on a Reddit forum called WallStreetBets to drive the price of GME to its recent heights, with the intention of harming investment managers who shorted the stock, by pushing them into a short squeeze. Similar activity has occurred around the shares of AMC Entertainment Holdings Inc. (NYSE: AMC) and Bed Bath & Beyond Inc. (NASDAQ: BBBY).
Some may view what is happening as a new breed of market manipulation, but it is unclear whether the SEC or other regulators will agree. It is possible there are organized groups within WallStreetBets taking profits. It is possible also that this trading truly is decentralized as the media reports. Senator Elizabeth Warren, in an open letter2 to Allison Herren Lee, Acting Chair of the SEC, expressed her concern about the “casino-like swings in the value of GameStop and other company shares” and, asked how the SEC intends to address and prevent these and future incidents of possible market manipulation.
However, to date, the SEC has not suspended trading in GME or any of the other affected tickers, which it may do should it determine a suspension is necessary to protect investors, the markets, or the public interest. The SEC may suspend trading in a stock due, among other things, to concerns about potential market manipulation, the ability of firms to clear and settle trades, or, as in a traditional pump-and-dump, the accuracy or completeness of a company’s press releases, or reports about its financial condition, business, or operations. Thus, it appears the SEC has made at least an initial determination that the facts and circumstances here do not give rise to sufficient concerns about abusive or manipulative trading in GME to warrant a suspension. Of course, that decision may change at any time.
We would expect the SEC’s Enforcement Division to be active on several fronts. In its statement on Friday, the SEC said it “will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” The statement also put issuers on notice that they must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities. And, of course, we would expect the Enforcement Division to review the relevant trading for manipulative conduct not apparent to the markets at the moment, including whether certain individuals were disseminating false or misleading information on Reddit or elsewhere.