FCA warns day traders of potential market abuse if they follow their US counterparts’ lead

The UK’s Financial Conduct Authority has warned day traders in the UK that they could be guilty of market abuse if they follow their American counterparts which have used derivatives and coordinated buying on websites such as the Reddit forum wallstreetbets, to create havoc on markets this past week.

A spokesperson for the watchdog said: “The FCA is aware of the situation and continues to closely monitor trading in UK markets. UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking. This applies to UK investors trading both US and UK stocks.”

It added, “Firms and individuals should also ensure they are familiar with, and abiding by, all regulations including the market abuse and short selling regimes in the jurisdiction they are trading in.”

Earlier this week, a group of day traders in Reddit’s r/WallStreetBets forum, going by the monikers such as “dumbledoreRothIRA” and “Coldcutcombo69” — decided to execute a “short squeeze” by pushing up the price of GameStop and other targeted stocks in hopes of inflicting losses on hedge funds that have placed large bets on the same shares.

The surge in trading drove the video game retailer’s value up by more than $10 bn on Wednesday alone. This prompted several trading platforms to temporarily place restrictions on the stock which have now been loosened causing the shares to gyrate wildly.

Although the activity has shaken the US markets, it has reverberated across the world. In Europe, the Vstoxx index, the European gauge of market volatility hit its highest level since early November. This has added to concerns over the economic damage being caused by the pandemic and shortages in some vaccines, whose rollout is deemed crucial to a recovery from the crisis.

In the UK, heavily shorted companies included Pearson, Cineworld and Hammerson, However, retail traders, in general, are a much smaller percentage of the UK market than their US peers. Estimates are that last year,  they accounted for roughly 12% of stock market activity compared to 25% across the pond.

The roller coaster ride is expected to continue into next month. As analysts at J.P. Morgan said in a note, “The unfortunate events in GameStop this week may be building a dangerous precedent for markets whereby retail investors act en masse to leverage their buying powers to spark fragility events,”

The market frenzy around GameStop though came as no surprise to many industry analysts. They contend it has been years in the making, reflecting the parallel growth of Reddit and Robinhood, which attracted millions of millennials by eliminating trading fees and making stock trading easy.

©BestExecution 2021

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