Federal and state officials in the US are investigating whether market manipulation is responsible for recent volatility in banking shares, according to an anonymous source familiar with the matter.
Short selling has come under scrutiny, with officials and regulators monitoring increased short-selling activity and share volatility, despite the strong fundamentals and adequate capital levels in the banking sector.
Short sellers made $378.9 million in paper profits on Thursday alone by betting against specific regional banks, according to analytics firm Ortex. Following the collapse of First Republic Bank, the third US mid-sized lender to fail in two months, regional bank shares have resumed their decline.
The White House has pledged to monitor “short-selling pressures on healthy banks.” However, any potential action would be taken by the Securities and Exchange Commission (SEC), according to White House press secretary Karine Jean-Pierre.
The American Bankers Association has urged the SEC to investigate significant short sales of banking shares and social media engagement that seemed to be “disconnected from the underlying financial realities.” The group has called for measures to reduce the avenues for abusive trading practices and restore investor confidence.
Short selling occurs when investors borrow shares from a broker, sell them at the current market price, and then buy them back later at a lower price to return to the broker.
Short sellers profit if the stock falls in price during this period, but losses can mount if the stock rises instead. Short selling can be an important tool for investors to hedge their portfolios or bet against overvalued companies, but it is also seen as potentially contributing to market volatility and stock price declines.
The recent volatility in the banking sector has put short selling back in the spotlight, with officials and regulators keeping a close watch on market manipulation.
The investigation highlights the need for transparent and fair trading practices to ensure investor confidence and market stability. While it remains to be seen whether any regulatory action will be taken, SEC Chair Gary Gensler has stated that the agency would pursue any form of misconduct that might harm investors or markets.
Potential market manipulation raises concerns
The Consumer Bankers Association’s President and CEO Lindsey Johnson has urged policymakers to speak out against “unethical behavior by activist investors” taking advantage of market volatility.
According to the source, share price swings did not reflect the fact that many regional banks outperformed on first quarter earnings and had sound fundamentals, including stable deposits, sufficient capital, and decreased uninsured deposits. However, the source did not disclose any specific cases that had caught the attention of federal or state regulators.
The California Department of Financial Protection and Innovation has stated that it cannot confirm any investigations or knowledge of specific marketplace activity. However, the department has emphasized its focus on detecting and preventing any unlawful practices in the markets that violate state law.
Short selling is not illegal and is considered part of a healthy market. Manipulating stock prices, which the SEC defines as intentionally or willfully deceiving or defrauding investors by controlling or artificially influencing stock prices, is illegal.
The SEC warned investors in March that it was carefully monitoring market stability and would prosecute any form of misconduct during a period of high market volatility surrounding the collapse of Silicon Valley Bank and Signature Bank.
While short selling can reveal overvalued companies and provide liquidity to investors, the recent volatility in the banking sector has increased concerns about market manipulation and the need for transparent and fair trading practices.
The investigation highlights the importance of ensuring investor confidence and market stability through careful monitoring and regulatory action where necessary.
The impact of the investigation into potential market manipulation and short selling in the banking sector is uncertain at this point. However, it could potentially lead to increased regulatory scrutiny and oversight of short selling activity in the industry, as well as greater transparency and disclosure requirements for investors.