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GameStop Trading Could Be ‘Systemically Wrong,’ State Regulator Says

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The top securities regulator in Massachusetts thinks trading in GameStop stock, which has been skyrocketing, suggests there is something “systemically wrong” with the options trading surrounding the stock

The videogame retailer’s stock was up 93% on Tuesday and has roughly quadrupled in the past week. It was up another 40% in after-hours trading Tuesday, to eclipse $200. Traders have been bragging on online forums about taking large bets the stock using options—often out-of-the-money calls that pay off only if the stock soars.

William Galvin, the Secretary of the Commonwealth of Massachusetts, said in a statement to Barron’s that he’s been watching the stock.

“This is certainly on my radar,” Galvin said. “I’m concerned, because it suggests that there is something systemically wrong with the options trading on this stock.”

Barron’s is awaiting further clarification from Galvin about what specifically makes the trading problematic.

Galvin has taken an active role in policing trading activities, even suing fast-growing online broker Robinhood late last year, claiming it prompts investors to take risky bets.

GameStop (ticker: GME) stock has been getting particular attention on popular forums like Reddit’s WallStreetBets section, where posters portray trading as a battle between them and short sellers who are hoping the stock tanks. Reddit did not respond to requests for comment on the discussions taking place in the chat room.

Simply announcing a position in a stock isn’t illegal. But regulators including the Securities and Exchange Commission do monitor trading for any signs of market manipulation and sometimes look at what people are saying about stocks in public forums, according to Amy Lynch, a former SEC regulator who is now the president of FrontLine Compliance, which consults with financial companies.

“I am certain that the division of market regulation is looking at this already,” she said in an interview on Tuesday.

The SEC declined to comment when asked if the agency is looking into trading in the stock.

The concern when investors publicly tout stocks is that it could be part of a “pump and dump” scheme in which someone can manipulate sentiment in a stock in order to boost the price before getting out near the top, Lynch said. She did not have any knowledge of such a scheme taking place in the case of GameStop, but the fact that the stock is moving with no apparent “fundamentals behind it” would catch the attention of regulators, she said.

Lynch said she doesn’t think the SEC would look at novice traders just looking to make money on a relatively minor bet. They’d be more interested in larger investors who could have more sway or a group of investors working in tandem to manipulate the stock price.

“They’d have to somehow be able to do an analysis of the chat room activity against the movement of the stock,” she said. “I think that would have to be step one. And then they need to try to find out who these people are that were actually making these trades.”

GameStop hasn’t responded to Barron’s request for comments about the stock’s soaring value.

Write to Avi Salzman at [email protected]

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