As SEC chair Gary Gensler warned Congress about the need to regulate crypto trading, US retail investors reacted to the recent bitcoin slump by driving another rally in GameStop and other ‘meme’ stocks.
(AF) SEC chair Gary Gensler testified to Congress about a need to increase investor protection in cryptocurrency trading on Wednesday May 26, then US retail investors showed their disdain for risk management by driving another surge in GameStop shares, with some trades a reaction to the recent fall in bitcoin.
Analysts think the renewed buying for GameStop and other so-called ‘meme’ stocks is at least in part due to US retail investors shifting their attention from bitcoin and other crypto currencies after they fell 30% or more from their highs of the year.
GameStop shares rose 16% on Wednesday to $242.56 to continue a rally that developed pace on Tuesday and reached the highest level since mid-March, while AMC shares were up 19.2% to $19.56, the highest since late January.
Shares of GameStop and other companies popular on forums such as Reddit’s WallStreetBets have been climbing in recent weeks and the rally accelerated on Tuesday and Wednesday.
GameStop is now 70% above its closing low for May, while AMC has risen 95% in the month-to-date.
GameStop’s big gains have caused some bearish investors to retreat, forced to buy shares to cover their short-sales.
Around 958,000 shares of GameStop, worth $201 million, were bought to cover short sales over the last week, S3 data showed. Roughly 11.55 million shares of GameStop, or 20.3% of its float, are currently sold short.
Short-sellers in GameStop are down $6.7 billion in year-to-date mark-to-market losses, including $339 million from Tuesday’s more than 16% gain and about $383 million due to Wednesday’s move, S3 data showed.
A short squeeze helped send GameStop shares up by more than 1,600% in January to a record high of $483. The stock pared most of those gains in the following month, only to bounce again in March.
Some analysts pointed to speculation that GameStop may be building a non-fungible token (NFT) platform. Website nft.gamestop.com advertised positions for engineers, designers and other jobs. GameStop did not provide further details.
About 20.6% of AMC shares are sold short, with short-sellers adding to their exposure by selling 1.18 million shares short over the last week.
With the rally in AMC shares, now up 822% for the year-to-date, shorts are down $1.37 billion in year-to-date mark-to-market losses, including $290 million losses from Wednesday’s rally, S3 data showed.
Some retail buying is linked to a shift out of cryptocurrencies after a sharp dip in bitcoin and other tokens in the last two weeks.
SEC chair Gary Gensler highlighted the dramatic increase in crypto trading volume this year, as well as the gaps in regulatory insight into flows, during his testimony to Congress on Wednesday.
“In recent weeks, the reported trading volume has ranged from $130 billion to $330 billion per day. These figures, however, are not audited or reported to regulatory authorities, as the tokens are traded on unregistered crypto exchanges. That is just one of many regulatory gaps in these crypto asset markets,” Gensler said.
“There are many challenges and gaps for investor protection in these markets. Tokens currently on the market that are securities may be offered, sold, and traded in non-compliance with the federal securities laws. Furthermore, none of the exchanges trading crypto tokens has registered yet as an exchange with the SEC. Altogether, this has led to substantially less investor protection than in our traditional securities markets, and to correspondingly greater opportunities for fraud and manipulation. The Commission has prioritized token-related cases involving fraud or other significant harm to investors,” Gensler said.
“Additionally, crypto lending platforms and so-called decentralized finance (DeFi) platforms raise a number of challenges for investors and the SEC staff trying to protect them. The SEC also is seeking comment on crypto custody arrangements by broker-dealers,” he added.
Gensler also reiterated that the SEC is examining the market for special purpose acquisition companies (SPACs) and how these interact with the traditional IPO market.