Wall Street Banks Clamp Down On Hedge Fund Shorting Of Meme Stocks

Following Wednesday's decision by Jefferies' Prime Brokerage to suspend short sales in meme stocks such as AMC, Gamestop and Microvision, other banks are following through with steps of their own, and as Bloomberg just reported that more of Wall Street’s top brokers are quietly tightening their rules for who can short the most-popular meme stocks which have soared in recent days.

In addition to Jefferies, Bank of America and Citigroup are now also among firms that have adjusted their risk controls at prime-brokerage operations, Bloomberg reports citing people familiar with the moves. With memories of the massive Archegos losses still fresh, the banks are trying to protect themselves against fallout from extreme surges and dips that have characterized trading in the most prominent meme 'stonks'.

As a result, hedge funds and other institutional investors who wish to short the "memes" now face higher collateral requirements or are simply prohibited from shorting certain stocks.

“Until further notice, Jefferies Prime Brokerage will no longer offer custody on naked options” in GameStop, AMC and MicroVision, the firm said in a memo to clients seen by Bloomberg News. Naked options allow investors to short a stock without owning the underlying securities. Jefferies, which told clients that other stocks may be added to the list, will also no longer permit short sales of those securities.

According to Bloomberg, the decision may change the fortunes of retail investors lighting up Reddit message boards with their forays into day trading, although it's not exactly clear just how. While on one hand, increased margin requirements will hasten the short squeezes small investors have been rushing to capitalize on forcing even more buying among the most shorted stocks. But on the other hand, if hedge funds pull back on short bets due to the new restrictions, the Reddit crowd won’t have as many opportunities to chase short squeezes.

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William K. 2 weeks ago Member's comment

How is short selling even legal? and how could naked short selling ever be considered even close to legal? Or does big money talk to law enforcement even yet. Fraud is fraud, no matter what one calls it.