The U.S. Securities and Exchange Commission (SEC) released a statement late on Friday warning multiple parties that the federal government would be cracking down on abusive and restrictive behavior related to recent volatility in the stock market.
A Saturday report from The Wall Street Journal explained what has been going on:
From Jan. 25 through Jan. 29, a ragtag army of individuals sent shares in GameStop Corp. up 500%, and sent many others skyrocketing too. In three days, many of these stocks gained more than most do in a decade. The hedge funds on the other side of these bets lost billions. …
Thousands of members of WallStreetBets, a forum at the online community reddit.com, have been leading the swarm of amateur individual traders buying stocks that hedge funds and other institutional investors were betting against.
Moving in sync and en masse, such traders can drive a stock way up or down even if each trader commits only a few dollars. Professionals, on the other hand, are legally restricted from colluding and incur much higher brokerage costs.
In response to investors driving stock prices of certain companies through the roof, some trading institutions that enable those investors decided to take action to freeze trading activity surrounding those specific stock — which sparked massive backlash.
The SEC released a statement following the end of trading on Friday to address the situation. The statement came from Acting Chair Allison Herren Lee and Commissioners Hester M. Peirce, Elad L. Roisman, and Caroline A. Crenshaw.
The statement said:
The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days. Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes. Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.
As always, the Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation. The Commission is working closely with our regulatory partners, both across the government and at FINRA and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing. The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.
In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities.