Congresswoman Maxine Waters: “Predatory short selling of pension funds must stop”
29 January 2021 US
Image: Maxine Waters
US congresswoman Maxine Waters has called a hearing to address “predatory short selling” by hedge funds, declaring “private funds preying on the pension funds of hard-working Americans must be stopped”, in the wake of the on-going GameStop drama.
Waters, who also serves as chair of the House Committee on Financial Services, said in a statement yesterday: “Addressing predatory and manipulative conduct is the responsibility of lawmakers and securities regulators who are charged with protecting investors and ensuring that our capital markets are fair, orderly, and efficient.”
The renewed war on short sellers by US politicians is the latest move in a culture war that broke out this month when retail investors collaborating through the Reddit forum WallStreetBets sought to pressure short sellers out of their positions in GameStop, a mall-based games retailer.
The franchise has been a short target for over a year as it has struggled to adapt its business model to the rise of digital downloads and, more recently, the effects of forced physical store closures brought on by the COVID-19 pandemic.
GameStop opened 2021 trading at around $18 per share, but once WallStreetBets 4.5 million subscribers mobilised using low-fee trading apps like Robinhood, its shares exploded by a stratospheric 1,744 per cent as of 27 January.
The activist retail investors claim to be standing up to Wall Street and backing the franchise against short sellers that are perceived to be driving a viable business into the ground for profit.
Waters now appears to have taken the side of retail investors.
She has committed to “reining in these abusive practices” by convening a hearing to examine the recent activity around GameStop and other impacted stocks “with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors”.
“We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price,” she states.
“Hedge funds have a long history of predatory conduct and that conduct is entirely indefensible,” she argues. “Private funds preying on the pension funds of hard-working Americans must be stopped. Private funds engaging in predatory short selling to the detriment of other investors must be stopped. Private funds engaging in vulture strategies that hurt workers must be stopped.”
Financial Services Committee was unable to immediately respond to questions around when the hearing may take place and what will be discussed.
Reflecting on Waters’ statement, Roy Zimmerhansl, practice lead at Pierpoint Financial Consulting, says: “It is a good thing for lawmakers to consider the impact of markets on individuals and pension funds and in any case, I would be hoping that the Securities and Exchange Commission looks into all of the trading activity around GameStop.”
“My concern in this matter is, in fact, only with the retail investor who may be the unwitting pawns in what is clearly a protest action – rebellious investors that are taking concerted action to fight against ‘the system’, Wall Street and hedge funds," he adds.
“Hedge funds are adults, day traders are fair game, these protest investors have decided to take action”, he explains, adding that many others will be swept up with the promise of massive profits as the stock leaps up day on day.
“In my opinion, an inexperienced investor has no place in a stock where intraday swings of 100 per cent or more occur,” he states.
“Additionally, representative Waters’ use of the words ‘predatory’ or ‘manipulative’ doesn’t help identify what issues she believes arise,” he adds, noting that regulations already exist to oversee short selling. This includes a ban on naked shorting and up-tick rules and “if investors or traders of any type have violated those, they must be held accountable,” he concludes.
“If the regulations are insufficient to punish what she has determined are ‘bad’ actions or actors, then as part of the government, it is her job to enable necessary regulations. If the regulations are sufficient, but the regulators don’t enforce them, then the government should make the regulators accountable and implement changes,” he says.
Waters’ declaration came hours after Robinhood, understood to be the primary marketplace for GameStop’s retail backers, restricted users’ ability to build positions in several volatile stocks, also including Nokia, Bed Bath & Beyond and American Airlines.
In a blog post explaining the unprecedented move, Robinhood writes: “In light of recent volatility, we restricted transactions for certain securities to position closing only.
“These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
"Starting 29 January, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.”
Robinhood goes on to state this was a “risk-management decision and was not made on the direction of the market makers we route to”.
Commenting on the meteoric rise of GameStop and the gamification of trading, Hazeltree's managing director of business development Tim Smith says: “When college kids start enthusiastically discussing short interest activity in a particular stock, maybe there has been a fundamental shift in market behaviour.
“Rather akin to one of the game ploys sold within its outlets, gamers, enabled by social media platforms and game-like brokerage technology, appear to have wrought havoc on one of the biggest short plays established by hedge funds, GameStop.”
Waters, who also serves as chair of the House Committee on Financial Services, said in a statement yesterday: “Addressing predatory and manipulative conduct is the responsibility of lawmakers and securities regulators who are charged with protecting investors and ensuring that our capital markets are fair, orderly, and efficient.”
The renewed war on short sellers by US politicians is the latest move in a culture war that broke out this month when retail investors collaborating through the Reddit forum WallStreetBets sought to pressure short sellers out of their positions in GameStop, a mall-based games retailer.
The franchise has been a short target for over a year as it has struggled to adapt its business model to the rise of digital downloads and, more recently, the effects of forced physical store closures brought on by the COVID-19 pandemic.
GameStop opened 2021 trading at around $18 per share, but once WallStreetBets 4.5 million subscribers mobilised using low-fee trading apps like Robinhood, its shares exploded by a stratospheric 1,744 per cent as of 27 January.
The activist retail investors claim to be standing up to Wall Street and backing the franchise against short sellers that are perceived to be driving a viable business into the ground for profit.
Waters now appears to have taken the side of retail investors.
She has committed to “reining in these abusive practices” by convening a hearing to examine the recent activity around GameStop and other impacted stocks “with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors”.
“We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price,” she states.
“Hedge funds have a long history of predatory conduct and that conduct is entirely indefensible,” she argues. “Private funds preying on the pension funds of hard-working Americans must be stopped. Private funds engaging in predatory short selling to the detriment of other investors must be stopped. Private funds engaging in vulture strategies that hurt workers must be stopped.”
Financial Services Committee was unable to immediately respond to questions around when the hearing may take place and what will be discussed.
Reflecting on Waters’ statement, Roy Zimmerhansl, practice lead at Pierpoint Financial Consulting, says: “It is a good thing for lawmakers to consider the impact of markets on individuals and pension funds and in any case, I would be hoping that the Securities and Exchange Commission looks into all of the trading activity around GameStop.”
“My concern in this matter is, in fact, only with the retail investor who may be the unwitting pawns in what is clearly a protest action – rebellious investors that are taking concerted action to fight against ‘the system’, Wall Street and hedge funds," he adds.
“Hedge funds are adults, day traders are fair game, these protest investors have decided to take action”, he explains, adding that many others will be swept up with the promise of massive profits as the stock leaps up day on day.
“In my opinion, an inexperienced investor has no place in a stock where intraday swings of 100 per cent or more occur,” he states.
“Additionally, representative Waters’ use of the words ‘predatory’ or ‘manipulative’ doesn’t help identify what issues she believes arise,” he adds, noting that regulations already exist to oversee short selling. This includes a ban on naked shorting and up-tick rules and “if investors or traders of any type have violated those, they must be held accountable,” he concludes.
“If the regulations are insufficient to punish what she has determined are ‘bad’ actions or actors, then as part of the government, it is her job to enable necessary regulations. If the regulations are sufficient, but the regulators don’t enforce them, then the government should make the regulators accountable and implement changes,” he says.
Waters’ declaration came hours after Robinhood, understood to be the primary marketplace for GameStop’s retail backers, restricted users’ ability to build positions in several volatile stocks, also including Nokia, Bed Bath & Beyond and American Airlines.
In a blog post explaining the unprecedented move, Robinhood writes: “In light of recent volatility, we restricted transactions for certain securities to position closing only.
“These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
"Starting 29 January, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.”
Robinhood goes on to state this was a “risk-management decision and was not made on the direction of the market makers we route to”.
Commenting on the meteoric rise of GameStop and the gamification of trading, Hazeltree's managing director of business development Tim Smith says: “When college kids start enthusiastically discussing short interest activity in a particular stock, maybe there has been a fundamental shift in market behaviour.
“Rather akin to one of the game ploys sold within its outlets, gamers, enabled by social media platforms and game-like brokerage technology, appear to have wrought havoc on one of the biggest short plays established by hedge funds, GameStop.”
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