Yellen says regulators need to understand GameStop frenzy before taking action

WASHINGTON • US Treasury Secretary Janet Yellen vowed on Thursday to protect investors, but said financial market regulators needed to fully understand the recent trading frenzy involving GameStop and other retail stocks before taking any action.

The core infrastructure of financial markets had proven resilient during the high volatility and heavy trading volume around GameStop and other stocks, Ms Yellen said after a high-level meeting with other top regulators to discuss recent market volatility.

But a timely study of the events by the Securities and Exchange Commission (SEC) was important, the Treasury chief said, adding that the SEC and Commodities Futures Trading Commission (CFTC) were reviewing whether the trading practices were consistent with investor protection and fair and efficient markets.

Ms Yellen told ABC's Good Morning America earlier on Thursday that it was critical to ensure "that our financial markets are functioning properly, efficiently and that investors are protected".

In her first media interview, Ms Yellen also said President Joe Biden's US$1.9 trillion (S$2.5 trillion) federal stimulus plan was needed to alleviate the economic pain caused by the coronavirus pandemic, which has left millions of Americans jobless.

"We never had anything so large even during the Great Recession. We need to make sure people have jobs, if they don't have jobs, that they're supported," Ms Yellen said, referring to the 2007-2009 economic contraction in the United States.

She said Mr Biden still wanted Congress to pass the plan on a bipartisan basis and "is looking to cooperate" with Republicans.

Ms Yellen convened the heads of the SEC, CFTC, the Federal Reserve Board and the Federal Reserve Bank of New York to discuss retail trading and "whether or not the recent events warrant further action", she told ABC. "We need to understand deeply what happened before we go to action, but certainly we're looking carefully at these events."

She did not specify what potential actions could be taken by regulators to respond to the situation.

Many on Wall Street have been stunned this past week by the sharp gyrations in shares of video game retailer GameStop, headphone maker Koss, cinema chain AMC Entertainment and other stocks and commodities favoured on the Reddit social media site's WallStreetBets forum.

Traders had bid the shares to dizzying heights in an effort to punish shortsellers - who profit when shares fall - forcing some hedge funds to close their positions at heavy losses. But the so-called "Reddit Rally" later collapsed, exposing many individual traders to huge losses themselves.

GameStop shares ended Thursday down 42 per cent at US$53.50, far from their peak of US$483 a week ago. AMC Entertainment has lost about two-thirds of its value after two weeks of wild swings.

Regulators likely discussed the online forums where mass buying of the stocks of those two companies was hot news last week, and the ever-larger role played by hedge funds in financial markets.

"Any kind of market distortion by investors agreeing to cause the distortion goes against the smooth and transparent functioning of markets," said Mr Andrea Cicione, head of strategy at TS Lombard, adding that such activity has not been previously scrutinised by regulators.

The SEC is reviewing social media posts for signs of potential fraud, Bloomberg News reported.

REUTERS