ASIC watching the market as shorts play out globally

The corporate regulator is on alert for emerging signs of a battle between amateur investors and hedge funds in the local market.

GameStop shares surged 325 per cent between Monday and Friday last week. Spencer Platt for Getty Images

The corporate regulator is on alert for emerging signs of a battle between amateur investors and hedge funds in the local market, as the frenzy over US stocks such as GameStop, and the war between Wall Street and Main Street, show no sign of slowing.

It comes as IG Markets late Friday joined other brokers in severely restricting trading of both GameStop and AMC Entertainment, allowing investors to sell their holdings in both companies but putting a halt on buying any stock. The limits also extend to IG Markets Australian clients.

“In order to prioritise the service we give our existing clients, IG is not currently allowing any new positions to be opened on the US stocks GameStop and AMC Entertainment,” the broker said.

“We continue to see high volatility in these and other stocks and positions may be subject to margin changes at short notice. High volatility increases the risk of sudden, large or rapid losses,” it added.

The moves to restrict trading of certain stocks have been met with outrage from affected investors: Popular US day trader platform Robinhood last week imposed a ban on buying selected stocks and was soon slapped with a class-action lawsuit.

eToro and Interactive Brokers are among the other brokers that imposed similar restrictions in the high-flying stocks last week. Their actions were reversed days later, but both cautioned that restrictions could be reimposed at short notice.

“GameStop will be available for trading on eToro if it is supported by the exchange and our liquidity providers,” eToro told The Australian.

“We would like to remind our users that we are seeing unprecedented market conditions and we may need to introduce restrictions to certain stocks at very short or no notice based on our liquidity providers,” the broker said.

Robinhood, meanwhile, was on Friday allowing users to buy just one share each of Wall Street stocks being targeted GameStop, AMC and BlackBerry. Shares in New York-listed GameStop bounced 68 per cent to $US325 as retail investors pushed back on the hedge fund sales. Likewise US cinema chain AMC Entertainment jumped 54 per cent to $US13.26

The trading restrictions prompted US regulators to step in, with the SEC on Friday saying it was closely monitoring the extreme price volatility of certain stocks and would review actions taken by regulated entities “that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities”.

Back at home, the Australian Securities and Investments Commission already regularly monitors social media platforms and chat forums for trading-related activity, but the regulator is now understood to be preparing for the recent trend in the US to manifest itself in the local market. Companies with a high proportion of their share register held as a short positions such as travel company Webjet, biotech Mesoblast and agribusiness Inghams Group among those expected to face volatility.

If such a phenomenon were to hit Australia, it would likely be on a smaller scale.

According to NAB director of investor behaviour, Gemma Dale, a short squeeze in the local market is possible, but unlikely.

“Over 100 per cent of the stock is short-sold there, whereas the absolute maximum you would see here is about 20 per cent. So to execute a short squeeze here in Australia is unbelievably difficult compared to over there,” she told The Australian.

“You’re talking five times more likely (in the US). If you’ve got 100 per cent of the stock sold short, you can put a lot of pressure on someone with a very small price increase,” she said.

Investors can buy and sell both GME and AMC stock on nabtrade, with the broker currently having no restrictions in place and seeing low volumes among its users.

“The only way we would be likely to respond to something like we’ve seen in the US (by restricting trade) is if we said ‘there’s so much volatility in this stock, we can’t lend to you for it’, but that’s a margin lending issue, not a broker issue,” she said.

Brokers will take their guidance on such moves from both ASX Ltd and ASIC, Ms Dale said.

Even prior to last week’s frenzy, sparked by chatter on Reddit subpage r/WallStreetBets, ASIC had tasked staff with monitoring such forums for trading-related talk. This is understood to have stemmed, in part, from its concern about copy trading and the perceived sway of social media influencers.

“We regularly monitor various forums, including the many chat sites, investor channels and other platforms generated by social media,” an ASIC spokesman said on Sunday.

“We can look more closely when there are sudden, perhaps inexplicable price movements, and we have the market visibility to then work backwards so as to see why.”

Likewise, ASX Ltd, the operator of the Australian Securities Exchange, is also monitoring for any big price moves and is ready to pounce with speeding tickets if necessary.

Indeed, local miner GME Resources found itself caught up in the trading frenzy last Friday when its shares rocketed more than 50 per cent in early trade before it was issued with a speeding ticket.

ASX-listed GME, which has the same stock code as US-listed GameStop, in a statement said it was not aware of any information concerning its business that could explain the trading volume and rapid price increase.

“The company notes recent media reports concerning trading activity in a US listed technology company called GameStop which also has an exchange ticker code ‘GME’ but notes this company is not related in any way to GME Resources Limited,” it said.