The Securities and Exchange Commission could consider a wide range of new regulations to help prevent future volatility and make strange pressures like those of GameStop and AMC Entertainment that captivated Wall Street last week.
The agency that oversees U.S. markets could pursue a litany of rules, ranging from a short-term interest rate cap on a specific value to aggressive short-term trade taxes, according to the Bank of America Merrill Lynch.
“Brokerage platforms have already been creating restrictions on margins, options and trading certain stocks with unusual activity,” writes BofA analyst Michael Carrier in a note to clients.
The carrier marked a list of rules that the SEC is likely to follow if it is to seriously prevent the dramatic changes that marked the last week of January.
In addition to the short interest limit and taxable short-term bets, Carrier said the commission could review payment for order flows and increase its oversight of social media to prevent market manipulation.
It is unclear when Gary Gensler, the president of President Joe Biden to preside over the SEC, will be confirmed in office, as the Senate focuses on the confirmation of candidates at the cabinet level and the forthcoming trial of the former president. Donald Trump.
An SEC spokesman declined to comment on the story, but referred CNBC to a statement it issued Friday. Although the regulator did not mention any party by name, it pledged to protect individual traders and to examine allegations of unfair trade restrictions that intermediaries might have imposed.
Still, Bank of America wasn’t the only Wall Street research firm curious as to whether the SEC could take decisive action after a few chaotic days in a handful of very short stocks.
GameStop, the protagonist of last week’s big negative business, hit 399.9% from its closing price on January 22nd until closing on January 29th. surprised most of Wall Street.
As the week progressed, it became apparent that the merger was largely the result of a coordinated group of retailers who took advantage of a short-term level of sale of GameStop shares. The group, which appears to have originated on Reddit, also targeted AMC and headset maker Koss.
Short-term selling is a strategy in which investors borrow shares of a stock at a certain price, with the expectation that the market value will fall from that level when it is time to repay the borrowed shares.
When the price of these shares rises instead of falling, short sellers are often forced to buy the shares they had lent to avoid further losses. When this happens en masse, it can lead to so-called short squeeze and even earn more in the stock price.
But the explosive movements, and the subsequent actions of the brokers to curb trade, provoked the anger of both sides of the political corridor. Senator Elizabeth Warren, an absolute advocate of financial oversight, criticized the SEC on Thursday for the regulator’s lack of action.
“We need an SEC that has clear rules on market manipulation and that has the backbone to go in and enforce those rules,” Warren said at the time. “To have a healthy stock market, you have to have a policeman at your pace.”
Echoing Bank of America’s analysis, Jefferies shared his own thoughts on how the SEC may try to stop future tightening of the same magnitude.
“With the confirmation of Gary Gensler as the new president of the SEC, the issue of market structure and the participation of retail investors has moved to the forefront,” analyst Daniel Fannon wrote in a note released Friday.
The analyst said he believes the regulator could weigh in on greater investor education around derivatives and risk management and increase the costs of certain products or services such as leverage and derivatives. It echoed Carrier’s views that the SEC could end up keeping information closer to hedge fund short positions and tighter payment oversight for order flow.
“Limiting access, increasing margin requirements, and restricting stocks create a temporary gap that gives the incoming SEC president a long-term problem to solve,” Fannon wrote. “Historically, changes in market structure, even in small sizes, require time and often involve audiences, pilot programs along with feedback from market participants.”
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