- Massachusetts Secretary of the Commonwealth William Galvin told CNBC the GameStop trading frenzy represents a risk to the U.S. stock market.
- "The marketplace should be a place where risk is taken, but not reckless risk," the securities regulator said.
- Brokerages such as TD Ameritrade have placed restrictions on trading activity involving GameStop and AMC Entertainment.
The wild trading involving GameStop shares presents a broader threat to the U.S. equity market, the chief securities regulator in Massachusetts told CNBC on Wednesday.
"The marketplace should be a place where risk is taken, but not reckless risk and not a situation that undermines the system, and that's what we're looking at here," Massachusetts Secretary of the Commonwealth William Galvin said on "The Exchange."
Galvin, who has served in his role for more than two decades, pointed to the fact that more than 100% of GameStop shares had been shorted prior to the epic short squeeze driven largely by retail investors who hyped the stock in online forums such as Reddit. He said the size of the short position creates structural risk and "has to be addressed immediately."
"It creates uncertainty in the marketplace," he contended. "You know, the dot-com bubble of 1999 — I was regulator then also — came about because of a lot of uncertainty in the market," following rapid rises in numerous speculative tech stocks.
The Dow Jones Industrial Average was down more than 450 points, or 1.5%, on Wednesday, and the benchmark S&P 500 slid nearly 2% as Wall Street digests a slew of corporate earnings and the speculative trading frenzy.
Galvin's comments Wednesday came shortly after brokerage TD Ameritrade put trading limits on stocks including GameStop and AMC Entertainment. The beleaguered movie theater chain also has seen its shares soar recently, including an intraday gain of more than 250% so far Wednesday.
"In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC and other securities," TD Ameritrade said in a statement. "We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors."
Charles Schwab also has put in place limits on certain activities involving GameStop shares. "At Schwab, we changed our margin requirements on GME to 'non-marginable' on January 13, 2021, and have put restrictions in place on certain transactions in GME and other securities," a spokesperson told CNBC.
Galvin contends the New York Stock Exchange should put in place a 30-day trading halt on GameStop shares. He said he believes the trading action is a particular problem for individual investors, some of whom may be newcomers who began buying stocks during the coronavirus pandemic trading boom.
"These types of entities, such as GameStop, have created a really difficult situation for these people. They think they're missing out if they don't make a bet on them," he said. "They don't really understand what they're doing. I think small-time investors like that, unsophisticated investors, are going to be hurt by this."
Shares of GameStop initially rose earlier this month after the video game retailer said Chewy co-founder Ryan Cohen was joining its board. As buyers moved into the stock, shorts started to scramble.
Short selling is a bet that a stock will decrease in price. 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.
But as GameStop's stock rose this month, shorts sought to limit their potential losses by purchasing stock at the current higher prices. And in chat rooms such as Reddit's WallStreetBets, other investors continued to rally behind GameStop — further increasing the stock's price.
GameStop shares traded around $6 just a few months ago, but by Wednesday afternoon, the stock was around $325. That's a gain of roughly 5,300%.
Galvin described the trading in GameStop shares as having "no basis in reality," both in its moves higher and sharp pullbacks within the same session. "That is not what you want in a capital market," he said.
— CNBC's Kate Rooney contributed to this report.