GameStop Fiasco Could Lead To New Rules on Short Selling, Options

Massachusetts Senator Elizabeth Warren gives rally speech
Michael Dwyer/AP/REX / Shutterstock.com

Following the Senate committee hearing of a few weeks ago that put stock trading app Robinhood founder Vlad Tenev under fire, U.S. regulators are re-evaluating trading rules, Bloomberg reported.

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The SEC is calling for changes related to regulations in stock trading, short-selling and the gamification of investing, which has spawned legions of retail day traders who have wreaked havoc on the market.

Addressing the “volatility in the market, particularly with regard to shares of GameStop Corp,” Securities and Exchange Commission Acting Chair Allison Herren Lee wrote a letter to Sen. Elizabeth Warren proposing several rule changes in regard to trading. At the same time, the Financial Industry Regulatory Authority is exploring whether its rules do enough to address the “potential risks” of smartphone apps that gamify stock trading and offer prompts and nudges to keep retail investors engaged, Bloomberg wrote.

As GameStop stock launches another rally, with shares up 70% this week, closing at $265 on Wednesday, these are some of the rules U.S. regulators are considering.

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Tougher Requirements for Brokers Offering Options Trading

In her letter, Lee suggested that the SEC “consider crafting regulations that require firms providing options trading to retail customers to disclose more information to those customers and more closely examine whether retail customers understand such products.”

She suggested that the burden lie on brokers to conduct sufficient “due diligence about whether individual customers qualify to trade options.” Lee’s letter specifically called out “short-term trading based on social media” as a contributor to market volatility.

In sentiments that echoed the Senate committee hearing, she also noted that firms receiving payment for access to their order flow were under an obligation to disclose that information.

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Higher Disclosure Standards for Hedge Funds Engaged in Short Selling

Lee’s letter also held hedge funds accountable for their actions, particularly in regard to short selling. She wrote, “The Commission should consider requiring increased disclosure of short-selling to regulators and the general public.”

Lee pointed out the dangers of short selling and, more significantly, the dangers of short sellers who spread rumors in attempts to devalue a company’s stock.

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Safeguards Against Extreme Market Volatility

Finally, she noted that the market seems to be resilient in the face of “wild swings” in stock value. But, Lee wrote, the SEC plans to explore the possibility that “such trading events could pose systemic risks in the future.”

She added, “The Commission is always concerned with the impact of significant volatility that is not explained by apparent market fundamentals.”

The agency continues to explore loopholes in market manipulation rules and where these boundaries lie in the age of social media.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.
GameStop Fiasco Could Lead To New Rules on Short Selling, Options
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