Short selling and short selling are not illegal. Nevertheless, the Securities and Exchange Commission and state securities regulators are closely monitoring these events. Here`s why. The main difference between a classic pump and dump and the shares of the r/WallStreetBets community is that apparently no false or misleading information has been spread to drive up stock prices. The r/WallStreetBets feed is filled with people who want to buy stocks, not because they had inside information that GameStop or the other companies were going to make a big comeback, but because they wanted to force the position of short sellers of hedge funds. While no one can say that money wasn`t a factor in their decision, r/WallStreetBets posters claim that personal gain was not their primary motivation. Of course, if there are people in the thread who spread false information or mislead people, they could not only be charged under 15 U.S.C. § 78i, but also under the Securities Fraud Act, 18 U.S.C. § 1348.
The Act makes it an offence to defraud or mislead another person with respect to the sale or purchase of property. So far, however, there has been no evidence that fraudulent or misleading statements have been made to persuade people following the thread to buy shares. «They won the game, or at least the first or second round of the game,» he said. «In the long run, these retailers are playing with fire because the prices of these stocks are very likely to fall. Then the question arises: «Who bears the loss?» It is very likely that these retailers collectively as a group are likely to incur significant losses. You may have heard that GameStop, the once ubiquitous video game store in shopping malls, had a good week for its stock price: a very good week. This caused such a stir that prominent American politicians noticed it. Prominent figures on both sides of the aisle, including Ted Cruz and Alexandria Ocasio-Cortez, agreed that investigations should be launched if retail investors are prevented from buying stocks, while hedge funds can continue to do so.
In an effort to profit from Wall Street short sellers, the r/WallStreetBets community sought to drive up the share price. The group`s underwriters encouraged each other to buy as many GME shares as possible in order to artificially inflate the price of GameStop shares and impose huge losses on short sellers. Short sellers quickly found themselves in what Wall Street investors call a «short squeeze.» Smart games on novice investors are a long-standing aspect of the market. The same goes for «pumping and emptying» systems, where some people play a stock, sell it and leave everyone hanging, Roper said. It seems a bit far-fetched to think that a little animated burst of confetti or whatever would entice a person to buy or sell a stock they wouldn`t otherwise have, but I think it has worked well in getting people to invest their Social Security checks in slots over the years. The outrage has managed to rally even the most unlikely allies, as Rep. Alexandria Ocasio-Cortez, Sen. Ted Cruz, Rep. Rashida Tlaib and Donald Trump Jr.
all tweeted in agreement that Robinhood`s actions were wrong and required further investigation. Rep. Ocasio-Cortez tweeted: «This is unacceptable. Now we need to know more about @RobinhoodApp`s decision to exclude retail investors from buying shares, while hedge funds are free to trade stocks as they see fit. Senator Cruz tweeted in response: «Totally agree.» Even though these Redditors came together for the express purpose of bankrupting a hedge fund by buying a particular stock, Seyhun said he thought it was legal. «Retail» is a term used to refer to individual traders as opposed to institutional investors (such as pension funds, mutual funds, etc.). Individuals` actions in the stock market, often coordinated via social media platforms such as Reddit, have triggered dramatic changes in companies` fortunes and angered commentators. The company generates the majority of its revenue from «order flow payments» (PFOF), a practice in which Robinhood transmits its clients` orders to market makers who execute them. Market makers are required by law to provide the best possible «execution quality» for each trade, but not the best possible price.
By executing trades at prices that are profitable for them but may not be in the trader`s best interest, market makers benefit by earning a portion of the difference between the bid-ask spread. They then pay a small portion of this profit in the form of discounts, PFOF, to the retail broker who sent them the orders (often referred to as «flows»). «Is their main motivation that `the share price should remain high or that I lose my shirt?`» he added. The more meteoric the rise in stock, Sabino said, the more likely regulators are to investigate GameStop`s moves. Hedge funds had severely short-circuited GameStop`s shares, but retail investors came together to work together to try to drive up the share price, forcing hedge funds to abandon their short positions. This would theoretically raise the GameStop share price even more. The retail crusader strategy worked to some extent, but regulators and many other Wall Street watchers were very alarmed. The WallStreetBets group succeeded, and the rise in the share price prompted hedge funds to abandon their short positions by buying GME shares (at the higher price) to give something back to their lenders. This has resulted in a continuous rise in the share price. Between January 12 and 27, 2021, the GME share price increased from $19.95 to $347.51, an increase of 1,742%.
As of January 26, 2021, GME was the most traded stock on the U.S. stock exchange, surpassing the volumes of Apple, Amazon, Tesla and Microsoft. Shares of GameStop rose another 73% on Friday. So far in January, the stock is up more than 400%, compared to only 1% for the Dow Jones Industrial Average DJIA, +1.93% and more than 2.5% for the S&P 500 SPX, +2.73%. However, what could potentially be illegal is how some trading platforms have responded to the GameStop stock rush. Robinhood, for example, temporarily stopped buying more GameStop stock on Thursday, allowing its users only to sell or hold the shares. Robinhood changed course on Friday. r/WallStreetBets subscribers may not be the only ones under regulatory scrutiny. The issue of market manipulation has also emerged in response to the decision by Robinhood and other investment apps to suspend the ability to buy the affected shares.
Founded in 2013, Robinhood is an app that enables commission-free trading of stocks and exchange-traded funds (ETFs). Robinhood prides itself on «democratizing finance for all» and says, «We believe everyone should have access to capital markets.» As of January 27 of this year, there were nearly 900,000 unique accounts trading GameStop stock on any given day – fewer than 10,000 at the beginning of January. From January 13 to 29, an average of 100 million GameStop shares were traded per day, a 14-fold increase over the previous year. The pattern repeated with similar trading volumes for other meme actions.