Sen. Elizabeth Warren has spoken on the stock market frenzy that has rattled investors this week and pitted Main Street against Wall Street. After shares of several companies, including GameStop, were inflated by retail investors spurred on by a Reddit thread called WallSreetBets, this morning, several financial trading apps, including RobinHood and WeBull, stopped investors from buying the stocks WSB recommended.
Warren posted on Twitter and then appeared on CNBC to say that she would be at the forefront of ensuring that the market is regulated going forward. She appeared on CNBC‘s Closing Bell to say that the Securities and Exchange Commission (SEC) should have stepped in to manage the situation.
“That’s the problem: How do you know who’s manipulating the stock at this point?” Warren said. “Are you entirely sure that there aren’t wealthy people on both sides? That hedge funds haven’t moved in on the side of the people who bid up the price of GameStop?”
What happened over the last week is that when hedge funds ‘shorted’ the stock of underperforming companies like the gaming retailer GameStop, retail investors, or those who are trading through apps like Robinhood, WeBull, and other apps that have democratized stock market investing, took advantage of the situation to buy en masse, thus driving up the price of the stock. The hedge funds basically bet against the stock by ‘shorting it’ or buying options that predicted the stock price would decrease.
Once the stock was driven up, hedge funds who bet against the stock had to cover their purchases at a higher price. This caused companies like Melvin Capital, a particular target of the Reddit buyers, to have to find billions of dollars to cover their positions.
Warren says that the SEC should have stepped in as soon as they saw the market volatility increase this week.
“We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules,” Warren said on CNBC. “To have a healthy stock market, you’ve got to have a cop on the beat.”
“That should be the SEC,” she continued. “They need to step up and do their job.”
Robinhood, WeBull, TD Ameritrade, Schwab, and Interactive Brokers all stopped sales of GME (GameStop) theater chain AMC (AMC Entertainment), technology companies NOK (Nokia) and BB (Blackberry), and apparel companies NAKD (Naked) and EXPR (Express), among others that were targeted for purchase by the Reddit thread.
All of those companies were struggling companies that buyers sought to raise the price of for-profit or even just for a show of strength against the Wall Street elite, many of whom railed against the driving up of stock prices.
But as many billionaires who supported the Reddit buyers and those who followed their lead, curtailing sales for smaller retail investors but not offering any punitive action against the hedge funds who could continue to trade was a blatant restriction of the free market.
By 5 p.m., GME had lost $153 in value, and the other companies had experienced losses as well. Angry investors hit Twitter and Clubhouse to condemn Robinhood, whose advertising advocates investment for all. By late afternoon a class-action suit was filed against the company alleging that they were restricting trading.
“While retail trading in some cases, like on Robinhood, blocked the purchasing of GameStop, hedge funds were still allowed to trade the stock,” Rep. Ro Khanna (D-California) told CNBC.
Warren, though, is not particularly supportive of the stock trading apps, telling CNBC that arbitration clauses that investors have to sign to use the app, mean those companies don’t have to be held accountable in situations just like this.
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She said, “If it turns out that [it] really did cheat you… It’ll never be made public, there will be very little that you can do about [it].”
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