Hedge fund tries to short Gamestop, now gets short squeezed by R/wallstreetbets

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Oops. Looks like the wrong people made money.

Why regulators may scrutinize GameStop's Reddit-driven retail stock surge

Jacob Frenkel, Securities Enforcement Practice chair for law firm Dickinson Wright, said the SEC would likely look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative.

“With federal prosecutors having become much more sophisticated in their cases over the years on securities trading ... it is reasonable to believe that any SEC investigation could well have a parallel criminal investigation,” he added.

Wild swings in GameStop’s shares led the New York Stock Exchange (NYSE) to halt trading in the company several times this week. But lawyers said there was sufficient marketplace confusion to warrant a longer suspension.

On Wednesday, the Massachusetts state regulator, William Galvin, called on NYSE to suspend GameStop for 30 days to allow a cooling-off period. “This isn’t investing, this is gambling,” he told Reuters in an interview. “This is obviously contrived.”

Good thing the feds are making sure that billion-dollar hedge funds who conduct high frequency trading at substantial fractions of the speed of light aren't coming out short because someone gamed the system.

[Absentee Voting Ghost of Ruin]

https://mobile.twitter.com/atl_q0/status/1354804030933884930

[Absentee Voting Ghost of Ruin]

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The maneuver, if done by institutional traders, would be a clear violation of the Securities  Exchange Act of 1934 and related SEC regulations against collusive trading and market manipulation. If prosecuted in a court it would most likely be classified as a securities fraud case.

The fact that it was done by retail investors in my personal judgement probably means the law and regulations don't cover it. r/WSB found a loophole in the rules, they made money, good for them. But that doesn't make them freedom fighters or anything of the sort. I'm glad the SEC is going after them to see if they violated any rules. The SEC could stop this kind of behavior by requiring brokers to monitor and guard against this activity (which they're basically doing now) and make forums like r/WSB into monitored spaces similar to how Bloomberg chats are monitored.

I am concerned that this may end up being an example of a deeply destructive pattern and practice in the United States where regulators avoid confronting major players, because doing so is difficult, yet still come down hard on market participants who lack the clout to push back.

For example, this story from back in 2018: SEC, strapped for funds, can't police financial markets.  This whole affair is outside my expertise, so I may very well be wrong. But the optics of it for the finance-government complex are French Revolution levels of terrible.