U.S. regulators are likely to scrutinize the quadrupling of GameStop Corp.’s shares over the past two weeks, a breathtaking buying spree turbocharged by bullish touts about the video game retailer on Reddit and other online forums.
Yet for the Securities and Exchange Commission, fighting online commentary that hypes stocks is an uphill struggle, mainly because it’s hard to prove such posts are part of an illicit scheme to manipulate the market. Rather, successful enforcement cases typically hinge on the SEC showing that investors knowingly spread false information to dupe other traders into buying or selling a stock.
“It’s an enforcement nightmare for the SEC,” said James Cox, a professor at Duke University School of Law who focuses on securities regulation. “The question is: where does the manipulation start and when does trading on your own hunches and publicizing your hunches start?”
As of now, GameStop has been a market success, its main victims being professional speculators like hedge funds who shorted its stock. But the SEC has been sensitive in the past to the risk of mom-and-pop investors getting caught up in buying frenzies that end in steep losses should the market turn.
Getting ahead of that threat poses an early test for Gary Gensler, President Joe Biden’s pick to lead the SEC. The former Commodity Futures Trading Commission chairman is viewed as a tough watchdog and with everything from SPACs to penny stocks booming, responding to bubbles might be a defining theme of his tenure.
While it began on obscure Internet sites, GameStop’s story is now known to everyone on Wall Street. The 37-year-old video game retailer, its brick-and-mortar business model presumed dead amid years of declining profits, has become an obsession of amateur stock jocks in Reddit’s WallStreetBets forum, whose deep value thesis morphed into a craze that is testing the mettle of short sellers. While no regulator has weighed in on the chat-room campaign, its concerted nature sits uneasily next to a stock where 50% swings are now a daily feature.
For the SEC, it’s not fraud when someone contends that a stock is undervalued, even if such arguments are disseminated to millions through social media. What becomes problematic is if investors post specific claims that aren’t opinions, such as asserting that a company is planning to file for bankruptcy. But homing in on such commentary, figuring out who’s behind it and what their motives are can be difficult for government agencies with limited resources like the SEC.
“If you can actually catch people knowingly passing on fraudulent information, then that is clearly illegal,” said James Angel, a finance professor at Georgetown University. “If all they are doing is saying, ‘hey I think this company is a good buy,’ there’s not a lot anybody can do about that.”
SEC spokesman Kevin Callahan declined to comment.
One thing that can’t be said of GameStop’s chat-room boosters is that they’ve been wrong thus far. While people can disagree on whether the stock was ever cheap, the last few days provide strong evidence that GameStop was vulnerable to a short squeeze, with bearish bets totaling more than 100% of its outstanding shares. Another strategy encouraged on Reddit -- calling up brokers and insisting they not lend out shares for shorting -- is a standard right of clients.