New York: The US Securities and Exchange Commission, facing intense pressure to respond to the recent mania in the stock market, said it's seeking to identify potential misconduct and will scrutinize brokerages' decisions to halt buying that triggered a retail-investor revolt.
The SEC warned traders about engaging in illegal schemes to drive up share prices and said it was working with other regulators, stock exchanges and federal agencies to "identify and pursue potential wrongdoing," according to a statement released Friday by acting chair Allison Herren Lee and the agency's commissioners.
The SEC leadership added that the agency "will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."
The remarks were the most aggressive yet from Wall Street's top regulator following a week-long frenzy that has seen small-time investors harness social media to drive up GameStop Corp., AMC Entertainment Holdings Inc. and other stocks, hedge funds get crushed by their short bets, and Robinhood Markets and other brokerages restrict trading in the inflated securities.
By Friday, restrictions had been lifted and the massive rally in GameStop and others was back on. The stock advanced 68% to $325 in New York trading.
The tumult has shaken the finance industry and prompted demands for SEC action from both Democrats and Republicans on Capitol Hill. The outrage reached a fever pitch Thursday, with lawmakers expressing indignation that investors were prevented from adding to their bullish GameStop positions. Many said they suspected the move was done to help hedge funds, a claim that brokerages rejected.
SEC officials briefed congressional staffers Friday on the agency's response to the frenzied trading, walking the aides through the types of fraud it's on the lookout for and explaining rules that prohibit investors from making false statements to move stock prices, according to a person with knowledge of the matter who asked not to be named because the discussions were private. The SEC officials also explained Robinhood's rationale for limiting trading in GameStop, the person said.
An SEC spokesman didn't immediately respond to a request for comment.
The SEC is grappling with the mayhem at a time when it lacks permanent leadership. Gary Gensler, who was a Commodity Futures Trading Commission chairman during the Obama administration and is also a former Goldman Sachs Group Inc. partner, is President Joe Biden's pick to take the reins at the SEC. But no hearings have been scheduled in the Senate to consider Gensler's nomination. Lee was installed as acting head this month.
The highly complex nature of stock markets and the lengthy process for writing new rules means any SEC regulatory changes are likely a ways off. Still, the agency has significant power to influence market behavior by opening investigations, fining or banning those accused of wrongdoing and using the bully pulpit to issue warnings - as it did Friday.
In pursuing possible manipulation of stock prices, the SEC said it's focus would be on protecting "retail investors." It cautioned that market participants "should be careful to avoid" illicit schemes.
Some of the most common are "pump-and-dumps," in which traders dump their shares after enticing others to buy at the inflated price. Still, such cases can be hard for the SEC to prove because they typically hinge on showing that investors knowingly spread false information to dupe others. And there's no indication thus far that the Reddit crowd sought to unload their holdings at the highs.
"There's no prohibition against momentum trading," said Brad Bennett, a former enforcement director of the Financial Industry Regulatory Authority, the brokerage watchdog. "It's the tulip bubble meets Twitter."
Donald Langevoort, a Georgetown Law professor, said the SEC will have to reach a conclusion as to whether the wild trading was triggered by misconduct.
"With all the political fallout, the SEC must do something about this," he said. "There's blood on the floor."
Sherrod Brown, the incoming chairman of the Senate Banking Committee, said he'd hold a hearing on the state of the stock market. In a Thursday statement, the Ohio Democrat said "it's time for the SEC and Congress to make the economy work for everyone, not just Wall Street." Representative Maxine Waters, who chairs the House Financial Services Committee, has also pledged to hold a hearing, saying in a Thursday statement that "hedge funds have a long history of predatory conduct."
Meanwhile, some lawmakers called for a deeper look into factors that have contributed to the dramatic rise in retail investing - a boom that has been fueled by popular online platforms like Robinhood's offering free trades.
Representative Rohit Khanna, a California Democrat, said on Twitter Friday that Robinhood Chief Executive Officer Vladimir Tenev must disclose whether he discussed the move to restrict trading with Citadel Securities, which pays Robinhood to execute a chunk of its clients' orders. The arrangement is key to how Robinhood makes money since it doesn't charge its customers commissions.
Citadel Securities had no role in brokerages suspending or limiting trading, a spokesperson said. In addition, the Citadel hedge fund wasn't involved in any way in the trading restrictions, the spokesperson added. Billionaire Ken Griffin controls both firms.
Alan Grujic, chief executive officer of All of Us Financial, said his online trading platform also temporarily stopped accepting buy orders Thursday for several stocks at the request of its clearing firm. Grujic said he didn't agree with the request, although he's sure there were operational reasons behind it.
"There's an element of protecting customers, but I have a concern that their inability to buy might unfairly weaken the choices that customers have," he said Thursday. "I worry when decisions are made that dis-empower a particular group."
As it seeks to get ahead of the wild market swings, the SEC is turning to the public for help. In its Friday statement, the regulator issued a reminder that market participants can submit tips and complaints to the agency.
"I am deeply concerned that these casino-like swings in the value of GameStop and other company shares are yet another example of the gamesmanship that interferes with the 'fair, orderly, and efficient' function of the market," Warren wrote in the letter to acting SEC Chair Allison Herren Lee.
These developments are "raising obvious questions about public confidence in the market and those trading in it," Warren said, adding that the agency must "act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders."
The Massachusetts Democrat, a member of the Senate Banking Commitee, asked the SEC to review its existing securities rules and find ways to "improve its enforcement capabilities." She gave the agency until Feb. 5 to respond to her questions.
Herren Lee is at the helm of the securities regulator while Biden's pick for chairman, Gary Gensler, awaits Senate confirmation.
'Extreme Price Volatility'
The agency is "closely monitoring the extreme price volatility of certain stocks' trading prices over the past several days," the SEC said in a statement released earlier Friday.
The SEC said it was also reviewing "actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities."
Lawmakers from both parties on Thursday questioned why platforms like Robinhood Markets Inc. curbed trading in some of the companies whose share price surged after being touted on social media.
Warren questioned whether the GameStop frenzy could indicate broader instability in the market and U.S. financial system. She expressed concern at the fluctuations in the stock market at a time where millions of Americans continue to suffer as a result of the coronavirus pandemic.
"The manipulation of share prices may exacerbate inequality and the impacts of the ongoing pandemic-related economic collapse," she wrote. "While investors work to outmaneuver each other in search of short-term profits, working families continue to suffer, underscoring the growing disconnect between the stock market and the real economy."
Democratic Senator Sherrod Brown, incoming chair of the Senate Banking Committee, and Representative Maxine Waters, chair of the House Financial Services Committee, have both pledged to hold hearings on the matter. Neither panel has announced a date for those sessions.
New York Representative Alexandria Ocasio-Cortez, a member of the Financial Services Committee, said on Twitter she supports holding a hearing and questioned why Robinhood decided to "block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."