“Given the amount of trading volume last week we saw, it is just hard for me to believe it was only these retail investors who were trying to push the squeeze,” Zhou told CNBC’s “Street Signs Asia” on Monday.
In the past week, U.S. market headlines have been dominated by the stunning rallies in stocks like GameStop, which has rocketed more than 1,500% since the start of the year. Investors were piling into stocks with a large percent of their shares sold “short” and creating “short squeezes,” or driving traders on the other side of the bet to buy more stock to cover their losses.
Short selling is a strategy in which investors borrow shares of a stock at a certain price in expectations that the market value will fall below that level when it’s time to pay for the borrowed shares.
“It is also very difficult to believe that in this short squeeze, the buy side is completely driven by the retail and there is no institutions jumping in,” he added: “Institutions are not dumb right? They look at these short-squeeze opportunities, they can definitely go in there.”
Retail traders have been largely credited with spawning these rallies, especially investors in the WallStreetBets community on Reddit. The market upheaval has generally been viewed through a populist lens, pitting Wall Street professionals against amateur traders armed with zero-commission trading apps like Robinhood.
As individual investors expressed enthusiasm over GameStop, AMC and other stocks on Reddit, questions began to surface about whether this trading activity amounted to market manipulation.
Zhou said while regulators “can definitely try to step in,” it’s not clear whether they will find evidence of market manipulation.
“In order to establish manipulation, you would need to establish some kind of malintention in the first place,” the professor said. “That is, in my opinion, not so obvious in this case.”
He explained the chatter on platforms such as Reddit can be characterized as investors simply “expressing their opinions” over stocks they wish to buy and sell.
“The hedge funds can do the same,” Zhou said. “Nothing … in this regard is particularly concerning.”
The burden of proof now falls upon regulators to establish “hard evidence” of wrong doing, a task that Zhou admitted was “quite difficult to establish.”
For its part, the Securities and Exchange Commission said it will review the recent trading volatility, saying: “We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”
— With reporting from CNBC’s Thomas Franck and Pippa Stevens.
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