Sen. Elizabeth Warren (D-MA) has called upon the U.S. Securities and Exchange Commission (SEC) to investigate potential “market manipulation” after an army of Redditers drove up the GameStop stock value to “squeeze” hedge fund short sellers. Warren characterized the scenario as a “flash mob with money” engaged in “internet trading schemes.”
In a letter to the SEC released on Friday, the senator who has typically castigated Wall Street in the past expressed deep concern about the Reddit army behind the GameStop surge, speculating that potential “market manipulation” had taken place.
“I am writing regarding the recent surge in share prices for the video game retailer GameStop, whose stocks are ‘up 1,700 percent this month, including Wednesday’s climb of 135 percent’ – driven by what one expert called a ‘flash mob with money,'” Warren began. “These wild swings in value of GameStop and other companies that are subject to similar bets by traders are ‘detached from the factors that traditionally help establish a company’s value to investors.’
“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, raising obvious questions about public confidence in the market and those trading in it,” she continued. I am writing to seek information on how the SEC intends to address these concerns and prevent these and future incidents of potential market manipulation. Hedge funds, such as Melvin Capital Management, have bet that GameStop’s shares would fall in the hopes of reaping substantial profits. In recent weeks, however, share prices for GameStop began to rise, with a dramatic surge in recent days fueled not by any changes in the company’s economic fundamentals but by anonymous traders on the Reddit forum r/WallStreetBets. News reports state that these traders moved quickly to buy options contracts in an apparent attempt to target large investors.”
Warren expressed concern that such rapid shifts in the market could create overall instability in the financial system by “forcing hedge funds on the losing side of these trades to sell parts of their portfolios to raise cash to cover their losses.”
“These wild fluctuations are just the latest indication that many private equity firms, hedge funds, and other investors, big and small, are treating the stock market like a casino, giving little consideration to the companies, communities, workers, and consumers that may be affected by these risky bets,” she argued. The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company’s workers, consumers, or the broader economy.”
With regard to the Reddit army, most specifically WallStreetBets, Warren lamented about the “troubling lack of clarity” behind the identities of those involved and “the degree to which their activities may be coordinated.”
“There is no way of knowing whether messages touting GameStop come from average Joes – or scam artists executing a ‘pump-and-dump’ stock scheme,” she said.
No evidence reportedly exists yet indicating that WallStreetBets and those who spearheaded the squeeze were participating in a “pump-and-dump,” which would be deliberately lying about a stock’s positive value and selling it to unsuspecting investors.
Read Warren’s full letter to SEC here.