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Waters, Warren back probe of hedge funds’ role in GameStop

House Financial Services to hold Feb. 18 hearing on GameStop

Waters said she wants to deal with the "unethical conduct" of hedge funds that led to recent market volatility.
Waters said she wants to deal with the "unethical conduct" of hedge funds that led to recent market volatility. (Tom Williams/CQ Roll Call)

House Financial Services Chairwoman Maxine Waters scheduled a hearing for Feb. 18 to examine the role hedge funds played in the GameStop stock trading frenzy, joining Sen. Elizabeth Warren in seeking to determine whether U.S. capital markets are being manipulated.

The House committee will examine the heightened trading activity around shares of the GameStop, a Texas-based video game retail chain, which skyrocketed 1,700 percent in January, driven by retail investors organizing online to target stocks shorted by hedge funds. Waters, D-Calif., announced the hearing agenda Monday.

“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,” Waters said in a statement. 

She and other members of the committee have said they want to examine how short selling by hedge funds contributed to the frenzy. The practice allows investors to bet the price of a stock will drop by selling borrowed shares, then buying them back later at a lower price and returning them, pocketing the price difference. If share prices rise instead, the investors can get caught in a “short squeeze” and suffer enormous losses.

Waters also said the committee should investigate the impact of online trading platforms that temporarily suspended customers’ purchases of GameStop, citing volatility and rising margin costs. 

Rep. Al Green, who heads the committee’s Subcommittee on Oversight and Investigations, said in a press conference that he wants to examine high-frequency trading and how it may disadvantage retail investors. The Texas Democrat said he would focus on that issue and online trading platforms during the upcoming hearing.

Rep. Brad Sherman, D-Calif., told CQ Roll Call in an interview last week that efforts to address the fallout from GameStop need to include financial education that emphasizes that capital markets are not a casino. Sherman leads the committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Warren letter

Warren, D-Mass., called on the Securities and Exchange Commission to issue clearer parameters on what constitutes market manipulation amid the GameStop tumult.

Warren, a member of the Senate Banking Committee that oversees the agency, said in a letter to acting SEC Chairwoman Allison Herren Lee that while anti-fraud provisions forbid the “dissemination of false or misleading information with the aim of manipulating investors into buying or selling securities,” the agency’s standards for market manipulation are “woefully unclear,”

“It is long beyond time for the SEC to act,” she said in the Jan. 29 letter. She urged the agency to issue rules defining what it means for traders to manipulate stock prices and to examine whether hedge funds or retail traders had broken the law in their trading of GameStop stock, which soared from less than $20 per share to almost $350 in a few weeks last month. The price fell back below $100 a share on Tuesday.

The jump was driven by retail investors coordinating online to buy up the stock, potentially putting the hedge funds with short positions at risk of a trading loss.

“The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders,” Warren said.

Warren also asked Lee to answer whether extreme swings in a company’s share price pose a systemic risk to financial markets and to detail the agency’s efforts to ensure markets reflect the value of underlying companies.

“These wild fluctuations are just the latest indication that many private equity firms, hedge funds, and other investors, big and small, are treating the stock market like a casino,” she said. “The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company’s workers, consumers, or the broader economy.”

The four sitting SEC commissioners, including Lee, have said the agency is monitoring the situation.