The United States security regulators suspended trading in the securities of 15 companies on Friday because of ‘questionable trading and social media activity.’ It is the most recent in a series of temporary trading halts amid the volatile trading of so-called ‘meme-stocks.’
According to a statement, the US Securities and Exchange Commission acted because none of these companies have filed any information with the regulator for more than a year. Notably, it is the SEC’s third and largest wave of suspensions in response to activities on social media (1).
Blue Sphere Corp, one of the firms, was recently highlighted in a report after a surge in valuation following a barrage of posts on online message boards.
The acting director of the SEC’s enforcement division, Melissa Hodgman (2), stated in a statement that ‘they are proactively monitoring suspicious trading activities linked to stock promotions on social media. They are acting quickly to stop that trading whenever appropriate to safeguard the public interest.’
Retail investors’ interest in certain stocks, most notably GameStop Corp, has surged in a social media frenzy. It is leading to volatile trading. While the regulator has routinely sought to remove moribund firms from exchanges because they are worried about retail investors suffering losses, their efforts are ramped up amid this year’s wild trading.
The agency stated, ‘the SEC is continuing to review the market and trading data to find other securities to potential attempts to exploit retail investors in the recent market volatility.’
The list of stocks the SEC suspended (3):
Blue Sphere Corp.
Ehouse Global Inc.
Bebida Beverage Co.
Eventure Interactive Inc.
Green Energy Enterprises Inc.
Eyes on the Go Inc.
Helix Wind Corp.
Marani Brands Inc.
International Power Group Ltd.
Net Talk.com Inc.
Pattern Energy Solutions Group Inc.
Universal Apparel and Textime Company
PTA Holdings Inc.
Wisdom Homes of America Inc.
Robinhood Facing Inquires
The stock trading application Robinhood also confirmed on Friday that it is cooperating with US regulators’ inquiries into its decision to temporarily halt the purchases of shares in companies like GameStop during the frenzied trading in January.
According to a filing with the SEC, the free brokerage platform faces inquiries from the state attorney general, federal financial regulators, and the US Congress.
It is also worth highlighting that Robinhood, which stated that ‘it is cooperating with the regulators,’ faces dozens of class-action lawsuits.
According to Robinhood filings, these lawsuits ‘mostly allege breach of contracts, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligence, and other common law claims.’
‘Robinhood believes that claims in these lawsuits have no merit, and they intend to defend against them vigorously.’
Last week, key players in the GameStop share trading frenzy claimed that their actions were above board and in-line with ordinary stock market business in front of the skeptical US lawmakers.
Robinhood founders and the Reddit online forum were among those to testify at a House of Representatives financial services committee hearing. Notably, a ‘subreddit’ known as WallStreetBets sparked the GameStop Wall Street upheaval.
“I am not trying to throw anyone under the bus. All I can say is Robinhood played it by the books”
– Vlad Tenev, Robinhood Co-founder and Chief Executive (4).
Nevertheless, the unprecedented recent volatility with the GameStop video game store shares, which surged more than 400%, prompted regulators to review social media’s role, trading platforms, and hedge firms as alleged market manipulators.
The Securities and Exchange Commission decided to ban trading in SpectraScience, a Minnesota-based healthcare firm, as new and inexperienced retail traders started flooding the country’s 45 trillion USD stock market, drawing scrutiny from Washington’s policymakers.
The SEC stated that social media accountants might be used in a coordinated attempt to ‘artificially influence’ the company’s share price, which doesn’t have a working website or phone line and has not filed quarterly financial results since 2017.
Suddenly in December, the company’s stock trading piled up and continued at elevated levels. On January 28, the day a retail-fuelled rally sent GameStop’s stock to a record high, and more than 3 billion SpectraScience shares changed hands (5).
The avalanche of orders pushed SpectraScience shares briefly above half a penny, the highest level in over four years. Notably, the company’s stock last traded above a penny in 2015.
The US securities regulators sharpened their gaze on the recent trading surge by retail investors, including several new Americans to the stock market. Last month, in an alert, the commission warned that ‘jumping on the bandwagon could end up in significant investment losses.’
The House of Representatives held a hearing last week on the volatility of the financial markets. They had also called Vlad Tenev to testify. Notably, Robinhood has become one of the go-to-platforms for new traders, many of which have piled into stocks such as GameStop, BlackBerry, and AMC in January.
Vanessa Countryman, the SEC’s secretary, wrote in the commission’s order that (6) ‘the commission believes that the public interest and investors’ protection need a trading suspension in the securities.’
Some activities appear like they have been orchestrated through social media platform Twitter, where day trader accounts tagged the SpectraScience ticker symbol (7). They spoke in bombastic terms about the share and their recent investments while discussing their so-called ‘penny-plays.’
An account named under Alexander Delarge amassed about 50,000 followers, encouraged users to purchase the stock in late January, added that it was likely to go 1 USD (8).
The user wrote that ‘he would be purchasing a million shares of a Dollar showing my buy order to keep it going as we all should.’
Among later tweets of the same account, one showed a screenshot of a 5.5 million SpectraScience shares portfolio, indicating that it had gained 50% in one day. It added that ‘let the haters watch when it blasts off!’
Another day trader account with high followers under Canadian Jennifer’s name also joined the chorus in early February (9). The user wrote that ‘Yes! I bought more; I am not telling others to purchase it; I only post what I see and hold. When my instincts kick in, I listen.’
Blue Sphere Corp., Another Penny Stock
One of the companies, which the Securities and Exchange Commission temporarily halted trading is a penny stock called Blue Sphere Corp. It was recently highlighted in a Bloomberg News story (10) shortly after its value witnessed a spike following a barrage of posts on online message boards.
Regulators are now venturing further into one of the market’s rowdiest districts, targeting penny stocks driven into volume and price frenzies through continuous social media pumping.
Notably, frenetic trading in profitless companies on lightly regulated broker networks is perhaps the most extreme example of speculative excess in the 2021 market. It is a landscape that has also included the soaring cryptocurrencies and SPAC craze.
It is also worth highlighting that in February 2021 alone, an average of 90 billion shares changed hands each day on venues such as those operated by OTC Market Group, often called ‘over-the-counter’ securities or the ‘pink sheets.’ This month, it added up to roughly 1.7 trillion shares, according to the Bloomberg Intelligence data compilation. In December, the total had exceeded 1 trillion for the first time in a decade.
Blue Sphere is one of many stocks that vaulted to viral sensation from obscurity, and on any given day, there are a dozen similar stories. Often, chatter on social media platforms such as Twitter and Stocktwits and other online chatrooms presages take off. According to Bloomberg Intelligence, it is happening as retail traders, equipped with zero commissions brokers, have swelled to 23% of stock trading volume, up 20% from last year.
SpectraScience had surged 633% in 2021 to only over two-tenth of a cent before the suspension of trading. The SEC’s order noted that while the company had not filed reports in years and its phone number doesn’t work, social media accounts may be engaged in a coordinated attempt to influence the share price artificially. Its volume had surpassed 3.5 billion shares on a single day in late January, and the stock surged 167% (11).
The Scrutiny of Regulators
The suspensions are the SEC’s latest efforts to address soaring retail investors’ interest-driven by social media platforms conversations.
Notably, the volatile trading in so-called meme stocks, assets witnessing sudden interest from retail investors through discussion on social media platforms have left both retail investors and hedge funds nursing steep losses in recent weeks. The recent market tumult has drawn the scrutiny of state and federal regulators and US lawmakers.
The SEC is looking at the action of any and all participants involved in the recent trading. According to its acting chair, the SEC is probing potential misconduct, including market manipulation, whether retail brokers breached fair access rules by restricting purchases, the role of hedge funds with a short position in firms, including whether there are enough transparency and data around their bets, and whether the organizations took benefit of the rally to secure funds.
According to the regulators, all securities suspended witnessed a sudden surge in their share prices and volumes in the absence of any publicly available news. The SEC further cautioned dealers and brokers to comply with investors’ protection rules when trading resumes (12).
Fears of Financial Watchdog
The financial watchdog fears the risk of a new trading frenzy based on social media as these platforms can tempt unaware investors to invest with fear of missing out and then find themselves holding the baggage.
In late January, the trend was led by the 400% surge in one week in GameStop’s share prices on a wave of bullish commentary on social media platforms, including Twitter and Reddit.
Short sellers were compelled to pay up to meet their bearish positions, and investors who had purchased at the heights were left suffering steep losses when the GameStop prices crashed back down.
“It is a reminder that investors should exercise great caution when investing based on social media or a sudden surge of interest for a particular security, especially where that interest doesn’t appear to link to any news about the company or industry.”
– Melissa Hodgman (13).
The Financial Industry Regulatory Authority is most likely investigating brokers’ social media activities tied to the recent stock trading frenzy. It can also ultimately scrutinize the company’s supervisory procedures and need fine-tuning of their compliance policy.
The regulator stated in guidance posted to its website that social media may be a new medium, but FINRA’s public communication rules are still applicable. The rules protect investors from misleading, false claims, exaggerated statements, and material omissions (14).
It is also worth highlighting that the erratic trading which had sent GameStop’s share price surging to a height of 483 USD in late January before crashing down, fueled in part by the Reddit board to counter Wall Street firms betting against it, the stock is now clocking at about 100 USD (15).
According to stock exchange rules or regulatory authority, a trading halt refers to a temporary stoppage of equity trading. It may occur for a single stock, an exchange, or a group of exchanges.
Important news about a company, whether good news or bad news, can lead to a temporary trading halt in the company’s stock. Especially when the news is expected to cause an immediate and drastic effect on the stock value or the news results in a large imbalance between buying and selling orders for the stock.
Trading halts can occur at any time during the trading day. However, they are most commonly imposed at the trading opening on the exchange where the stock held its primary listing. They are typically imposed for about one hour, but they can happen more than once during a single day. Moreover, when a stock’s trading is halted, it is often only for five to ten minutes.
A trading halt’s primary purpose on a stock is to help ensure fair trading for all investors. Stopping trading when there is important news or event about a public firm offers time for the information to be adequately communicated to all investors and assimilate the information to make informed and rational decisions about the steps they may wish to take regarding an investment in the affected equity.
A technical glitch can also trigger a trading halt as it can cause problems regarding the placement and transmission of orders to purchase or sell a certain stock.
Other triggers for a trading suspension include a company’s stock is no longer meeting the exchange’s listing requirements. Or because a company is not up-to-date on its needed public filings like publishing its annual income statement (16).
The Securities and Exchange Commission (17) can also impose trading curbs on individual stocks to halt extreme volatility in a stock’s price movement. Under existing regulations, trading suspensions are imposed on a specific if any of the following conditions arise within five minutes of trading:
- If there is a 10% change in the price of a stock that is part of the Russell 1000 Index, the Invesco PowerShares QQQ ETF, or the S&P 500 Index
- If there is a 30% fluctuation in the stock prices that trade for 1 USD per share or more
- If there is a 50% fluctuation in the price of a stock that trades for less than 1 USD per share
The SEC can also impose a trading suspension in a specific stock for an indefinite time when it has serious questions about the company’s assets, operations, or other financial information (18).
For instance, the SEC recently decided to revoke the stock registration of a company named Long Blockchain Corp. The move will effectively ban the general public from trading its shares. The SEC stated that Long Island’s blockchain business never became operational, and the firm has failed to report its financial results for the past three years.
Notably, the Long Island Tea company had rebranded itself as the Long Blockchain Corp back in 2017. The movement came during the historical crypto market bull run that had briefly led Bitcoin to surge nearly 20,000 USD before it came crashing down to below 4,000 USD by December 2018.
The company rebranded itself to take advantage of the large amount of capital that entered the nascent digital asset space at that time. Several initial coin offerings were carried out during the bull run of 2017 and early 2018, and most of these so-called blockchain projects were either scams or didn’t have any legitimate use case or product. However, the name change led to almost an immediate tripling of the company’s stock price.
However, besides the name change, the company’s strategy was not clear. The company had stated that it would be shifting its primary corporate focus to exploring and investment opportunities in blockchain technology.
At first, the company had announced its plan to acquire Bitcoin mining hardware, but it was never materialized. In the light of the development, the Nasdaq stock exchange had also decided to delist the company. It forced investors to trade the company stock through over-the-counter desks. And now, since the SEC decided to revoke the company’s registration, the general public won’t be able to trade its share (19).
The Bottom Line
According to the SEC (20), amid the worries of unusual trading activities and social media use to inflate the stock prices artificially, it has thus far suspended trading in about 24 companies, including the 15 companies from Friday.
Notably, none of the firms suspended on Friday have filed any information with the SEC for more than a year. And according to the federal securities laws, the SEC can prohibit trading for ten days and bar a broker-dealer from soliciting investors to purchase or sell the stock again until certain reporting needs are met.
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