The UK’s financial regulator has warned it is closely watching trading activity in the wake of frenzied share dealing in GameStop and other companies.
Amid soaring prices fuelled by social media chat on sites like Reddit, the Financial Conduct Authority fired a warning shot at potential lawbreakers.
Traders should “ensure they are familiar with all regulations, including market abuse,” the FCA said.
GameStop is the focus of a trading war between amateurs and Wall Street pros.
Shares in the US bricks and mortar video games retailer have soared as much as 700% in the past week, only to fall sharply when some trading platforms temporarily restricted access.
Official trading will resume in New York later on Friday, but limited pre-market dealing overnight suggests the volatility will continue, with GameStop rising about 60% after a sharp falls.
UK traders have joined in the share trading chat on forums on Reddit, Facebook and other sites, raising concerns about misinformation and share ramping.
London-listed companies have also been the focus of social media attention, including publisher Pearson and cinema operator Cineworld, although the share price movements were minimal compared with the GameStop surge.
In a statement on Friday, the city regulator said: “The FCA is aware of the situation and continues to closely monitor trading in UK markets. UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking. This applies to UK investors trading both US and UK stocks.
“Firms and individuals should also ensure they are familiar with, and abiding by, all regulations including the market abuse and short selling regimes in the jurisdiction they are trading in.”
Regulators in the US have also issued warnings they are monitoring the situation, which took a further twist on Thursday when a number of share trading platforms temporarily stopped dealing in GameStop and several other firms, including AMC Entertainment and American Airlines.
One of these was Robinhood, a new breed of broking firms popular among a new generation of younger, tech-savvy investor, but which has been accused of “gamifying” share trading.
The decision to suspend trading sparked outrage among investors, who accused the firm of working on behalf of traditional Wall Street investors who were losing out to the army of amateurs. There are reports in the US that some disgruntled investors were preparing legal action.
The anger has spread beyond the investment community, with rappers and US politicians on both sides of the Washington divide joining the backlash against Wall Street.
“This is unacceptable,” tweeted Representative Alexandria Ocasio-Cortez, a Democrat. “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”
Her tweet was shared by Republican Senator Ted Cruz who commented “fully agree.” Tesla founder Elon Musk, whose shares have also been a retail favourite, also commented on Ms Ocasio-Cortez’s tweet, saying “Absolutely”.
Why have GameStop shares surged?
Key to what’s going on is “short selling” or “shorting”, where a big investment firm such as a hedge fund tries to make money by betting that a company’s share price will fall.
The hedge fund borrows shares in a company from other investors (for a fee) and sells the shares on the markets at, for example, $10 each, waits until they fall to $5, and buys them back. The borrowed shares are returned to the original owner, and the hedge fund pockets a profit.
GameStop – which saw heavy losses last year and was described as “failing” by one big investor – is the most shorted stock on Wall Street.
But in the last week, amateur investors who follow the Wall Street Bets forum on Reddit have poured money into buying the company’s stock with the aim of pushing up the price.
If the price rises dramatically, short sellers face big losses and they need to buy back the shares they have borrowed quickly to prevent bigger losses – a process known as covering.
However, buying back the shares only adds to demand for the stock and pushes its price higher still.