Wall Street slows down hedge fund short bets on meme stocks

(Bloomberg) – Wall Street’s top brokers are quietly tightening their rules for who can bet against the most popular retail meme stocks.

Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Jefferies Financial Group Inc. are among the companies that have adjusted their risk controls in blue chip brokerage operations, according to people familiar with the measures. Banks are trying to hedge against the fallout from the extreme ups and downs that have characterized the trading of companies such as AMC Entertainment Holdings Inc., MicroVision Inc. and GameStop Corp.

The changes mean some hedge funds and other institutional investors now face higher collateral requirements or are limited to short selling certain stocks, the people said, asking not to be identified to discuss the decisions. internal policies.

“Until further notice, Jefferies Prime Brokerage will no longer offer bare option custody” in GameStop, AMC and MicroVision, the firm said in a note to clients seen by Bloomberg News. Bare options allow investors to sell a stock short without owning the underlying securities. Jefferies, who has informed his clients that more stocks may be added to the list, will also no longer allow short sales of those securities.

Representatives for Goldman, Bank of America, Citigroup and Jefferies declined to comment. It is not uncommon for banks to adjust their risk controls as market conditions change.

The measures can change the fortunes of retail investors by shedding light on Reddit bulletin boards with their forays into day trading. Increased margin requirements could accelerate the short cuts that small investors have rushed to capitalize on. On the flip side, if hedge funds pull back from short bets due to the new restrictions, the Reddit crowd won’t have as many opportunities to chase squeeze shorts.

Archegos Fallout

Many brokerage firms have revisited their risk controls after some of the industry’s largest prime brokers were forced in March to liquidate Bill Hwang’s multi-billion dollar Archegos Capital Management portfolio at a reduced price, though Bank of America and Citigroup are among those who came out of the saga unscathed. The little-known family office has collapsed after making a series of counter-current bets on media and tech companies.

“Fortunately, it hasn’t hurt taxpayers or investors,” Morgan Stanley chief executive James Gorman told lawmakers last month at a House Financial Services Committee hearing. “It hurt Mr. Hwang and his family office, and it hurt the banks that were his main brokers.”

Morgan Stanley recorded a loss of $ 900 million related to the ordeal.

The origins of what is known as the meme stock craze – in which retail investors push seemingly random stocks to dizzying heights – are largely unclear, though some analysts have pinned the trend on the fact that No-cost brokerage apps have proliferated just as many Americans are flush with savings.

AMC has become the new king of stocks even in recent days. Investors have pushed shares of the movie company to more than 2,000% this year alone. GameStop Corp., the initial beneficiary of the frenzy on Reddit tips for investing in stocks earlier this year, is up more than 1,000%.

Robinhood Markets

It’s not just Wall Street taking a more cautious stance. Policymakers have also raised concerns about prolific retailing, especially options that can multiply risk. After the GameStop troubles earlier this year, House Democrats asked retail brokerage leader Robinhood Markets Inc., among others, about profits at the expense of small investors.

Key to part of the debate was the practice of naked short selling. The strategy allows hedge funds to place bets that exceed the market values ​​of certain companies. It has become a signal to small investors that there is profit potential from a short squeeze.

(Updates to add Goldman Sachs to the second, fifth paragraphs.)

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