A phenomenon erupted in January involving mostly novice retail traders pushing up the share prices and options of certain listed companies heavily shorted by hedge funds to make them lose money as part of a push against perceived Wall Street greed.
These traders are coordinating their actions on social media sites such as Reddit and have inflicted hefty losses on short sellers of stock in companies such as bricks and mortar games retailer GameStop and cinema chain AMC Entertainment creating extreme price swings in the process.
Sellers have been forced to pay very high prices for stock to close out their short positions. Most of the companies targeted have been relatively small with mediocre balance sheets – hence short sellers were betting on their share prices falling.
Traders also targeted the silver market to inflict losses on a large US bank that was heavily short on the metal
The traders also allegedly targeted the silver market to inflict losses on a large US bank that was heavily short on the metal.
However, brokerage firms have been forced to curb the trading of affected stocks as clearing houses asked for more capital against positions in those shares.
Reflecting concern over disorderly markets, US Treasury Secretary Janet Yellen is holding talks with the US Securities and Exchange Commission (SEC), the New York branch of the US Federal Reserve and the US Commodity Futures Trading Commission.
The SEC has warned market participants and brokerages that it is on high alert for any misconduct.
This article first appeared in The Banker's sister publication Global Risk Regulator.
