- Major Wall Street brokers are tightening rules over who can bet against meme stocks that are popular with retail traders, according to Bloomberg.
- Goldman Sachs, Bank of America, Citigroup, and Jefferies Financial are among the firms that have adjusted risk controls.
- Jefferies Prime Brokerage will no longer offer custody on naked options in AMC Entertainment, GameStop, and MicroVision, the report said.
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Some of Wall Street’s largest brokers are quietly tightening rules on who can bet against meme stocks popular among retail traders in an effort to protect themselves against the fallout from sharp price surges and falls, according to a Bloomberg News report.
Firms that have adjusted risk controls at their prime-brokerage operations include Goldman Sachs, Bank of America, Citigroup, and Jefferies Financial Group, the Friday report said, citing people familiar with discussions about internal policy decisions.
With the adjustments, some hedge funds and other institutional investors now face higher collateral requirements or are limited from shorting certain stocks.
Jefferies Prime Brokerage will no longer offer custody on naked options in AMC Entertainment, GameStop, and MicroVision, the firm told clients in a memo seen by Bloomberg News. Naked options allow investors to short a stock without owning the underlying securities. Jefferies will not permit short sales of those securities and other stocks may be added to its list.
The changes come during a new wave of rallies among so-called meme stocks including AMC GameStop as retail investors on social media sites such as Reddit’s Wall Streets Bets forum band together to force short squeezes on hedge funds that betting shares of the companies will fall. AMC has been the key focus of the latest rally, similar to GameStop’s role during a trending frenzy in January.
It’s not unusual for banks to make risk-control adjustments as market conditions change, the report noted.
A number of brokerages have been looking over their risk controls after some large prime brokers in March were forced to liquidate at a discount the multibillion-dollar portfolio of Bill Hwang’s Archegos Capital Management. The family office collapsed after making wrong-way bets on media and technology companies. Bank of America and Citigroup were not hurt by the Archegos matter, Bloomberg said.