A social media-driven trading frenzy cooled further on Wednesday as U.S. Treasury Secretary Janet Yellen called a meeting of top officials that could result in tougher markets regulation for hedge funds, small investors and stockbrokers.
Mass buying by amateur traders over the past two weeks has driven wild price gyrations in companies that U.S. fund managers had bet against, including videogame retailer GameStop and cinema operator AMC Entertainment.
GameStop’s U.S.-listed shares, which scaled as high as US$483 last week, fueled by posts on the popular Reddit forum WallStreetBets, deflated this week to US$90 as fee-free broker apps including Robinhood imposed buying curbs.
They fell another five per cent on Wednesday, while shares of AMC were up 3.8 per cent following a drop of 41 per cent a day earlier. GameStop’s Frankfurt-listed shares continued to decline, falling 36 per cent by 1510 GMT.
Silver, which briefly surged on Monday as small traders bought up the metal, steadied about 10 per cent below its recent peak.
“The unwind is obvious,” said Oriano Lizza, premium sales trader at brokerage CMC Markets in Singapore, adding that it would be easy for nimble small investors to regroup and target fresh companies.
“I think from a regulatory standpoint, the concern is that they could continue to do this,” he said.
The head of the U.S. Securities and Exchange Commission, which regulates markets, will meet with Yellen and the heads of the Federal Reserve and the Commodity Futures Trading Commission, possibly as soon as Thursday, a Treasury official told Reuters.
Yellen has asked to discuss recent volatility and whether trade has been consistent with fair and efficient markets.
It was not clear if a meeting could result in action, but experts expect focus to also fall on the ever-larger role played by non-bank firms such as hedge funds in financial markets, while small traders are bracing for a showdown.
“Final boss fight. It’s happening tomorrow with Yellen, SEC and Federal Reserve,” read one Wednesday post on Reddit. “They are either going to try and stop the party or they are looking for money to pay us and not crash everything at the same time.”
Robinhood said on Wednesday it was allowing buying of fractional shares in GameStop and AMC, five days after restricting the practice that has encouraged smaller traders by reducing the size of the amount they need to invest.
Small investors’ participation in stock markets has exploded over the past year, but the gambling sparked by a combination of pandemic lockdowns, volatility and stimulus payments comes with high risks that regulators may want to quell.
Still, there have been no clear signals on what form any official action could take, with potential targets ranging from retail brokers’ capital requirements to questioning the fee-free brokerage model that has encouraged much of the trade.
The benchmark S&P 500, meanwhile, has continued to grind higher this week and the CBOE volatility index has fallen for three straight days as analysts said the Reddit action appeared to be constrained to a handful of stocks rather than spilling over to the broader U.S. stock market.
“There isn’t much of a worry that this is a signal that could destabilize the whole system,” said Simona Gambarini, markets economist at Capital Economics.
“If monetary and fiscal policy remains supportive and the economy recovers from the pandemic with the help of vaccines then equities could go up quite a bit more.”
Other so-called “meme stocks” caught up in the Reddit rally rose on Wednesday, with headphone maker Koss Corp and home furnishing retailer Bed Bath & Beyond rising 27 per cent and 2.2 per cent, respectively. BlackBerry Ltd’s U.S.-listed shares were down 3.2 per cent following a 21 per cent slide a day earlier.
GameStop, AMC, BlackBerry and Koss did not respond to Reuters requests for comment. Bed Bath & Beyond declined to comment.
The retail trading boom drove volumes in U.S. equity options to a record monthly high in January and some investors may now be turning to “put options,” which are often used to protect against losses or position for declines in a stock’s price, as an alternative to shorting the stock, analysts say.
Demand to borrow GameStop shares has subsided significantly in recent weeks but remains high overall, making it relatively expensive to short the stock.
Online broker Robinhood has also come under pressure and has scrambled to raise more than US$3 billion in a week as it races to meet funding needs stemming from the trading boom.
Robinhood further relaxed some of its restrictions on trade on Tuesday, increasing buying limits on GameStop stock from 20 shares to 100 shares.
“The enthusiasm for this unique situation is waning but we’ll continue to see people focused on what the retail investor as a flash mob can accomplish,” said James Gellert, CEO of RapidRatings, which assesses the financial health of companies.
(Reporting by Tom Westbrook in Singapore and Sagarika Jaisinghani in Bengaluru; Additional reporting by April Joyner, Saqib Iqbal Ahmed in New York, Susan Mathew, Eva Mathews and Uday Sampath Kumar in Bengaluru and Thyagaraju Adinarayan in London; Editing by Vidya Ranganathan, Jane Wardell and Bernard Orr)