Toronto, Feb 2, 2021 – Large hedge funds have been short-selling stocks, betting that their loss-making business will completely fail. At the same time, with the help of recent low-priced or even free trading tools, millions of small stock buyers have been guided through online forums to buy stocks.
In January 2021, there was a brief run on the shares of American video game retailer GameStop and other securities, which caused significant financial consequences for certain hedge funds, and short sellers suffered huge losses.
The short squeeze unfolded in January 2021 and peaked uncontrollably
Approximately 140% of GameStop’s public holdings were sold short, and the rush to buy shares to fill these positions due to rising prices led to further increases. The short run was initially triggered by users of sub-reddit, an Internet forum on the social news site Reddit, although many hedge funds also participated in the event.
At its peak on January 28, the short-term depression caused the retailer’s share price to reach a pre-market price of more than $500 per share, which is almost 30 times the $17.25 valuation at the beginning of the month. The prices of many other heavily shorted securities have also increased.
On January 28, some brokerage firms, including Robinhood, stopped buying GameStop and other securities, and later stated that they were unable to post enough collateral in the clearing house to execute their customers’ orders.
This decision aroused criticism and accusations from prominent politicians and businessmen in various political fields. Dozens of class-action lawsuits were filed against Robinhood in US courts, and the US House of Representatives Financial Services Committee held a congressional hearing on the incident. As brokers stopped buying GameStop and other securities, the total market value of cryptocurrencies and metal futures also increased.
GameStop short squeeze and Toronto stock market
In Canada, securities regulations in many provinces contain provisions prohibiting market manipulation. The main regulation in Ontario is the Securities Act (RSO 1990).
Accordingly, individuals or companies shall not directly or indirectly engage in or participate in any acts, practises or processes related to securities, derivatives or basic rights and interests of derivatives that the person or company knows or should reasonably know.
It is worth noting that this provision prohibits actions that individuals or companies should know fall into one of the two categories in paragraph. This means that although individuals or companies have no actual intention to conduct artificial prices or misleading transactions, they may still be liable.
Normal transactions between buyers and sellers are conducted in a fair manner, reflecting actual demand and supply; regardless of the impact on prices, it can be said to be a real market impact. However, if demand or supply is distorted, then prices may also be distorted-no longer reflecting real market demand and supply, which will be artificial.
A variety of trading strategies can be used to artificially generate high (or low) security prices. Some are listed below. Some people doubt whether the broker intends to restrict securities trading on its online platform and artificially lower the stock price, and whether it also meets the conditions.