In line with the Massachusetts regulator, GameStop hypothesis poses a risk to your complete market as TD Ameritrade restricts buying and selling
Wildlife trading in GameStop stocks poses a bigger threat to the US stock market, the Massachusetts chief securities regulator told CNBC on Wednesday.
"The marketplace should be a place where risk is taken but no reckless risk and no situation that undermines the system, and that is what this is all about," said William Galvin, secretary of the Commonwealth of Massachusetts, in The Exchange .
Galvin, who has been in his role for more than two decades, pointed out that more than 100% of GameStop's stock was slashed ahead of the epic short squeeze, which was mainly driven by retail investors who like the stock on online forums Upplayed Reddit. He said the size of the short position creates structural risk and "needs to be addressed immediately".
"It creates uncertainty in the market," he said. "You know, the dot-com bubble of 1999 – I was also a regulator at the time – came about because of the great uncertainty in the market," after the rapid surge in numerous speculative technology stocks.
The Dow Jones Industrial Average fell more than 450 points, or 1.5%, on Wednesday and the benchmark S&P 500 index fell nearly 2% as Wall Street digested a number of corporate profits and the speculative trading frenzy.
Galvin's comments came Wednesday shortly after broker TD Ameritrade set trading limits on stocks like GameStop and AMC Entertainment. The beleaguered cinema chain has also seen its stocks surge recently, including a more than 250% intraday gain on Wednesday.
"To minimize the risk to our company and our customers, we have restricted some transactions for some transactions in GME, AMC and other securities," said TD Ameritrade in a statement. "We made these decisions out of caution under unprecedented market conditions and other factors."
Charles Schwab has also restricted certain activities with GameStop stock. "At Schwab, we changed our margin requirements for GME to 'non-marginalizable' on January 13, 2021 and restricted certain transactions in GME and other securities," a spokesman told CNBC.
Galvin believes the New York Stock Exchange should introduce a 30-day freeze on GameStop shares. He believes the trading action poses a particular problem for individual investors, some of whom may be newbies who started buying stocks during the coronavirus pandemic trading boom.
"These kind of entities like GameStop created a really difficult situation for these people. They think that if they don't bet on them they are missing out," he said. "They don't really understand what they're doing. I think such small investors, not sophisticated investors, will be affected."
GameStop's shares rose earlier this month after the video game retailer said Chewy co-founder Ryan Cohen will join its board of directors. As buyers moved into the stock, the shorts began to creep.
Short selling is a bet that the price of a stock will go down. In the case of GameStop, some investors believe the brick and mortar retailer will continue to struggle as online shopping trends accelerate and consumers increasingly purchase video games through digital downloads.
As GameStop's stock rose this month, Shorts sought to limit their potential losses by buying shares at the current higher prices. In chat rooms like Reddit's WallStreetBets, other investors continued to rebound behind GameStop and further increased the share price.
GameStop stock was trading around $ 6 a few months ago, but on Wednesday afternoon the stock was trading at $ 325. That is a gain of around 5,300%.
Galvin described trading GameStop stock as "baseless in reality" both in its higher moves and in its sharp retreats within the same session. "That's not what you want in a capital market," he said.
– CNBC's Kate Rooney contributed to this report.