Compliance

SEC Warns Markets Over Volatility; Big Test For Gensler

Tom Burroughes, Group Editor, February 1, 2021

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The man nominated by Biden to lead the SEC has a big task in tackling hectic market trading linked to GameStop and now, the silver market. The regulator late last week warned market players about volatile trading behavior.

The main US financial regulator has fired a warning shot about market volatility linked to retail investor attacks on short-selling in recent days – a situation that has seen silver prices, for example, surge by 20 per cent since the middle of last week. 

During London trading hours silver rose by as much as 9 per cent today, reaching $29.43 around 11:10 GMT (Daily FX, February 1).  

The rise has been prompted, media reports said, by users of the Reddit platform buying the metal to squeeze out short-sellers – the same tactic they used to hit those shorting the price of US games retailer GameStop. Shares in the retailer surged again last Friday, up by 68 per cent. Another stock targeted by traders, AMC Entertainment, rose by 54 per cent. Such moves went against wider market trends, with indices ending the week slightly lower.

In a January 29 statement, the Securities and Exchange Commission, said it was “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days.”

“Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes. Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence,” the SEC said. The statement was signed by acting chair Allison Herren Lee; commissioner Hester M Peirce; commissioner Elad L Roisman, and commissioner Caroline A. Crenshaw. 

The volatile activity will be a big test for former Goldman Sachs banker Gary Gensler, nominated by President Joe Biden to take over as SEC boss. If the saga hurts retail investors, the SEC will want to be seen as protecting millions of investors’ portfolios. Gensler has yet to be confirmed by the US Senate.

Comments on the silver market began circulating on Reddit forums last week, reports said. One comment read that the “Silver Bullion Market is one of the most manipulated on earth. Any short squeeze in silver paper shorts would be EPIC.” Another post on the forum stated that “inflation-adjusted silver should be at $1000 instead of $25. Why not squeeze $SLV to the real physical price. Think about the Gainz. If you don’t care about the gains, think about the banks like JP Morgan you’d be destroying along the way.” (Source: Daily FX)

Adrian Ash, research director at physical metals trading platform BullionVault, said: “We've seen people try to corner the market in silver before, but the size and speed of the Reddit Ramp is off the charts for silver. The billionaire Hunt brothers took a decade to build their position in the 1970s, and Warren Buffett built his mid-1990s' holdings over a couple of months. Both helped drive the price higher, but nothing like as fast as the 'hive mind' of Reddit has spiked silver 20 per cent since Wednesday night [last week].”

“The flood of new interest in silver has emptied coin shops, but there's plenty of metal in wholesale storage, and any talk of a 'shortage' will in truth refer more to trucking and handling capacity rather than physical stockpiles,” he said. 

The attack on short-selling is against a practice used by hedge funds to profit by taking a negative view of a market, or to hedge against downside risks, and as such is a widely-used wealth protection tool. But at certain times, such as during the 2008-09 financial crash, the practice of shorting has been politically attacked as making market falls more severe than they would otherwise be. 

“As always, the Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation. The Commission is working closely with our regulatory partners, both across the government and at FINRA and other self-regulatory organizations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing,” the SEC said in its statement. “The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

“In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities,” it said. 

BullionVault’s Ash warned that silver is a notoriously volatile metal, and that market participants who try to make it more volatile as part of a campaign were playing with fire.

“While short-term spikes and dips in price are great for trading platforms like BullionVault, we hope the long-term case for precious metals investing becomes clear to silver's sudden flood of new buyers. Fact is, however, anyone buying silver should know that it's called `the devil's metal’ for a reason. Volatility can be swift and violent, and it can be hard to miss the long-term uptrend in prices if you suddenly find yourself sitting on a loss,” he said. 

Gensler stepped down from leading the Commodity Futures Trading Commission in early 2014. Since then, he has taught finance at the Massachusetts Institute of Technology and written about financial-technology innovation, such as the rise of bitcoin – another volatile entity.

Melvin Capital Management, the hedge fund that was hit hard by the soaring stock prices of heavily shorted stocks, reported lost 53 per cent on its investments in January (source: Wall Street Journal, Jan. 31, quoting unnamed sources).

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