GameStop: FCA warns of market abuse as Reddit fever hits the UK

Traders have been warned they could be guilty of market abuse amid a trading frenzy that has turned ordinary investors against Wall Street.

UK investors should be wary of “very volatile market conditions,” the Financial Conduct Authority (FCA) said after users on the Reddit social media website began raising the price of certain stocks to get back into hedge funds and other short sellers.

The FCA warned that traders who join the Reddit crowd to plow their money into these stocks could even break the rules of market abuse – if they were found to have artificially increased the price of a stock.

The bizarre trading frenzy, dubbed the “French Revolution of Investing” by some industry insiders, seems to have begun to allow disaffected millennials to return to the crunchy hedge funds that blame them for their financial troubles.

They target stocks that have been severely trimmed by hedge funds.

Selling short or short selling is a way for investors to bet against the success of a company. When stocks fall, short sellers make money. If they go up, short sellers can suffer heavy losses.

By encouraging each other to buy these short companies, users of Reddit and other forums and social media platforms have driven the price up and caused hedge funds to bleed money.

While the phenomenon started in the US with a little-known video game retailer called Gamestop, it quickly spread in the UK.

Badly shortened companies like Pearson, Cineworld and Hammerson saw their stock prices soar this week for no apparent reason.

American Airlines was mentioned on the Reddit thread yesterday, which caused its shares to jump up to 30 percent at one point. This set off a chain of speculative trading between UK-listed airlines.

Easyjet rose 4.6 percent despite a dire trade update, while Wizz Air rose 4.7 percent after heavy losses and IAG, the owner of British Airways, rose 4.8 percent.

A City Watchdog spokesperson said: “When trading stocks in highly volatile market conditions, UK investors should be careful to fully understand the risks they are taking.

“Businesses and individuals should also ensure that they are familiar with and comply with all regulations, including the market abuse and short selling regulations in the jurisdiction in which they operate.”

US regulators are also cautious. President Joe Biden’s economic team is to “monitor the situation.”

And Nasdaq chief executive Adena Friedman warned that the exchange operator could open an investigation if a “significant increase in chatter on social media” corresponds to “unusual trading activity”.

The Reddit-led phenomenon emerged after years of frustration among younger generations with the status quo of the financial system.

One Reddit user wrote, “I was in my early teens during the 2008 crisis. I remember vividly the tremendous impact Wall Street’s ruthless actions had on my personal life. ‘

And while the trend among day traders may have started with an ax to grind, normal savers soon began to pile up to take advantage of soaring stock prices.

Gamestop was the most traded stock on Hargreaves Lansdown, the UK’s largest investment platform for savers, last week.

The dangers became clear yesterday – Gamestop shares, which had soared more than 1,700 percent since the start of the year, fell 32 percent, causing pain for those who had shopped at the top.

Susannah Streeter, Senior Analyst at Hargreaves Lansdown, said, “People really risk getting their fingers burned.”

But Justin Urquhart Stewart, co-founder of investment firm 7IM, said, “I think that’s great – it’s a real kick in the shorts for the hedge funds that have had it in their own way for years.”

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GameStop put a tough question on the signs of the financial regulators.

A debate is raging – albeit at a slower pace than history – about whether the US financial regulator, the SEC, should step in, or whether the little boys and girls who come together to take on the big shots of the hedge fund is something She should keep her nose out.

The FCA will also have been deeply debating behind closed doors what to do if the fever spreads to the UK.

Fuel was added to the fire when the US free trading app RobinHood, which eased much of the GameStop buying frenzy, stopped its customers’ purchases yesterday.

This sparked the bizarre sight of left-wing politician Alexandria Ocasio-Cortez, who tweeted to endorse retail investors’ right to put their savings on a severely overvalued stock with high risk financial derivatives.

It also led to allegations of a corrupt financial system trying to crush ordinary people who rebel against it, and false claims about the links between some of the actors involved.

Posts claimed Citadel owns RobinHood and has stopped customers buying GameStop because the company was also involved in short selling hedge fund targets Melvin.

In reality, RobinHood is privately owned by its founder and his venture capital company. Citadel does not own RobinHood, but does business with it by paying RobinHood for the flow of orders – this gives it an overview of what is being bought and sold, what it is using as a benefit for its own trade, and pays for RobinHood’s free trade – Customers. and Citadel got into Melvin at most likely fire selling prices after suffering huge losses in its GameStop short selling battle.

As with anything finance-related, relationships are tangled and the reality is far more complex than the simple narrative of Wall Street’s big guns crushing the little people.

Aside from the few hedge funds that have lost, most of Wall Street is likely to make more money on the antics of GameStop, etc., due to the massive volume of trading.

On the surface, GameStop is an amusing stock market tale at a time when we all need a laugh: When people want to engage in stupid action with greater foolish swing, knowing that they will lose money if they are the last fool – so be it.

Behind it, however, is a huge speculative bubble in high-risk stocks and options trading. From tulips to the 1920s to the dotcom era, it is ultimately individual investors who always lose the most when those bubbles burst.

The financial watchdogs know this, and while yesterday as a financial commentator I could just write “Caveat Emptor” on GameStop, regulators have a much more difficult job of figuring out what, if anything, they are doing.

> How the GameStop saga developed