The Securities and Exchange Commission could consider a wide range of new regulations to help prevent future volatility and short squeezes, such as those at GameStop and AMC Entertainment that captivated Wall Street last week.
The agency that oversees US markets could follow a litany of rules, ranging from a short-term interest rate cap for a specific title to aggressive taxes on short-term trading, according to Bank of America Merrill Lynch.
“Brokerage platforms have already created restrictions on margins, options and trading of certain securities with unusual activity,” BofA analyst Michael Carrier wrote in a note to clients.
The operator has ticked off a list of rules the SEC could follow if it is serious about preventing the dramatic changes that marked the last week of January.
In addition to the short interest rate cap and the taxation of short-term bets, Carrier said the commission could move to a review of payment for order flows, as well as increase its oversight on social media to avoid market manipulation.
It remains unclear when Gary Gensler, President Joe Biden’s election to lead the SEC, will be confirmed in office, given that the Senate is focusing on confirming cabinet nominations and the process of ousting former President Donald Trump.
An SEC official declined to comment on the story, but sent CNBC a statement on Friday. Although the regulator did not mention any of the parties by name, it promised to protect individual traders and to consider allegations of unfair trade restrictions that brokerages might have imposed.
However, Bank of America was not the only research firm on Wall Street, curious as to whether the SEC could finally take decisive action after a few chaotic days in a handful of sharply shortened stocks.
The poster child of last week’s wild transactions, GameStop gathered 399.9% from the closing price on January 22 to the closing on January 29. took most of Wall Street by surprise.
As the week progressed, it became clear that the rally was largely the result of a coordinated group of retailers taking advantage of an oversized level of missing sales in GameStop shares. The group, which appears to have appeared on Reddit, also targeted AMC and headset maker Koss.
Short selling is a strategy in which investors borrow shares of a stock at a certain price, in the expectation that the market value will fall below that level when it is time to pay off the borrowed shares.
When the price of these shares rises instead of falling, missing sellers are often forced to buy back the shares they have borrowed to prevent further losses. When this happens en masse, it can lead to a so-called short squeeze and even an additional gain in the share price.
But the explosive moves and subsequent actions of brokerages to restrict trading have drawn anger on both sides of the political aisle. Senator Elizabeth Warren, an open champion of financial oversight, robbed the SEC on Thursday of the regulator’s failure to take action.
“We need an SEC that has clear rules on market manipulation and then has the backbone to go in and enforce those rules,” Warren said at the time. “To have a healthy stock market, you have to have a policeman in rhythm.”
Echoing Bank of America’s analysis, Jefferies shared his own thoughts on how the SEC can try to stop future short cuts of the same magnitude.
“Since Gary Gensler will be confirmed as the new president of the SEC, the issue of market structure and retail investor participation has come to the fore,” analyst Daniel Fannon wrote in a note released Friday.
The analyst said he believes the regulator could weigh in more investor education on derivatives and risk management and rising costs for certain products or services, such as leverage and derivatives. He recalled Carrier’s thoughts that the SEC could better pursue short positions in hedge funds and tighten oversight of payment for the flow of orders.
“Limiting access, increasing margin requirements and restricting stocks create a temporary halt, giving the SEC president who comes up with a long-term problem to solve,” Fannon wrote. “Historically, changes in market structure, even in small sizes, are time consuming and usually involve hearings, pilot programs along with comments / feedback from market participants.”
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