Washington is considering launching congressional hearings into Wall Street following a scramble of social-media-driven trading activity this week that caused GameStop and several other formerly obscure stocks to spike.
Under particular scrutiny is trading app Robinhood, which on Thursday restricted buying or trading in GameStop stock and other stocks caught up in the flurry of activity. The popular stock-trading app informed users that they could close out positions on the highly volatile stocks but could not purchase additional shares.
Robinhood, which has about 13 million users, was a key tool in efforts by a group of Reddit users from the subreddit WallStreetBets who plotted to push the stock of GameStock and several other companies higher in an attempt to undermine traditional Wall Street hedge funds that had shorted the companies. Several hedge funds have already seen major losses in the wake of the chaos, including Citron Research and Melvin Capital, which was forced to obtain a nearly $3 billion cash injection to cover its losses.
House Financial Services Committee chair Maxine Waters and incoming Senate Banking Committee chair Sherrod Brown, both Democrats, said their committees will each hold hearings to scrutinize the situation.
The Securities and Exchange Commission said Friday that it is reviewing moves made by brokerages that may “disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
“We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws,” the SEC said.
Online broker Interactive Brokers also restricted trading for GameStop, AMC, BlackBerry, Express, and Koss to “liquidation only,” the company said in a statement Thursday.
GameStock shares quickly sank in response to the news of the restrictions. The company’s shares had skyrocketed this week to above $400 from less than $19 at the end of 2020.
“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,” Democratic senator Elizabeth Warren (Mass.), a longtime Wall Street critic, wrote in a Friday letter to the Securities and Exchange Commission.
“There are rich people on both sides of this, people who are trying, it appears, to manipulate this market,” she told CNBC. “And that’s what we don’t know the details of.”
A day earlier, Charles Schwab and TD Ameritrade also restricted trading on GameStop and AMC.
Later on Thursday, Robinhood was hit with a federal class-action lawsuit from its users over the suspension of trading in GameStop stock.