WRAPUP 7-GameStop rallies back as U.S. regulators eye wild trading

(Adds closing prices, Texas attorney general)

* 'Reddit Rally' stocks climb again; broader market sells
off
Regulators warn they are watching for "wrongdoing"
Robinhood trading app eases some restrictions
GameStop, Koss shares higher but below peaks

By Sagarika Jaisinghani, Medha Singh and John McCrank

Jan 29 (Reuters) - The U.S. Securities and Exchange
Commission waded into the battle between small investors and
Wall Street hedge funds on Friday, warning brokerages and
social-media traders it was on alert for any wrongdoing in this
week's roller-coaster trade.

GameStop shares rallied again, awarding retail
investors the advantage in the latest round of their week-long
slugfest against major financial institutions that had shorted
the video game retailer.

The so-called "Reddit rally" has inflated stock prices for
GameStop and other previously downtrodden companies that
individual investors championed on social media forums such as
Reddit's Wallstreetbets, which has almost 6 million members.

GameStop surged 68% on Friday after brokerage apps including
Robinhood eased some restrictions on trading. GameStop shares
fell on Thursday following the curbs, which drew calls for
scrutiny from regulators and outrage from celebrities and
politicians on both sides of the political aisle.

Robinhood said late on Friday opening new positions in 50
securities including GameStop is currently allowed, but limited.

Koss Corp was up 53%, but both the headphone maker
and GameStop remained below peaks reached earlier this week.

Hedge funds and other short sellers had a bruising week.
GameStop short sellers have endured mark-to-market losses of
$19.75 billion so far this year, according to S3 Partners. Even
so, the stock remained highly shorted, with $11.2 billion short
interest.

The SEC issued a rare joint statement from its acting chair
and commissioners that said it was working closely with other
regulators and stock exchanges "to protect investors and to
identify and pursue potential wrongdoing" and would "closely
review actions ... that may disadvantage investors" or hinder
their ability to trade stocks.

The showdown between small traders and professional
short-sellers also drew scrutiny from lawmakers, the White House
and the attorneys general of New York and Texas.

Texas Attorney General Ken Paxton issued 13 civil
investigative demands, the civil equivalent of a subpoena, on
Friday to Robinhood and others that put curbs on stock trading,
calling it "shockingly unprecedented and wrong."

The battle added to uncertainty in equity markets that had
looked ripe for a pullback. Some funds were forced to sell some
of their best-performing stocks, including Apple Inc,
to cover billions of dollars in losses on short positions.

All three main indexes suffered their biggest weekly fall
since the end of October on Friday, closing down around 2%.

SURGE IN VOLUME

The surge in volatility has led to a huge increase in
volume, totaling over 20 billion shares in each of the past two
sessions across U.S. exchanges for the most active trading days
on record going back to 2014, according to Refinitiv data.

The "Reddit stocks" have accounted for as much as 7.6% of
that volume, according to Piper Sandler analyst Rich Repetto.

"The markets were vulnerable to a decline ... and this
Reddit activity was the catalyst that sort of triggered the
sell-off," said Sam Stovall, chief investment strategist at CFRA
Research.

GameStop marked a near 400% weekly gain, eclipsed by Koss's
1,800% week. AMC Entertainment rose 54% on Friday, and
was up 278% for the week, while Express added almost
28%.

Virgin Galactic closed up 2.7%, Bed Bath & Beyond
was up 5%, and American Airlines fell 5% after
a rally the prior session. Since the start of the week,
BlackBerry Ltd more than doubled to touch $36 on
Wednesday before easing back to $19.96 on Friday. Silver
continued a blistering rally.

While some companies swept up in the so-called "Reddit
rebellion" have used the opportunity to raise capital, most have
said little about the volatility in their shares. GameStop did
not reply to multiple requests for comment. AMC, BlackBerry and
Koss did not immediately respond to requests for comment.

For a full list of Reuters stories about the GameStop
phenomenon, please see:

RESTRICTIONS

Restrictions imposed on Thursday were driven by the high
concentration of risk in hot stocks and by increased
clearinghouse capital and deposit requirements, Piper Jaffrey
said.

While Robinhood eased the curbs on Friday, it was still not
allowing purchases of fractional shares in GameStop and some
other companies, meaning smaller investors must bet more to
buy-in. The brokerage was also limiting the number of shares any
one account could hold.

London-based trading platform Freetrade disabled buy orders
for U.S. stocks but will allow users to exit positions.

While the battle could limit short-sellers' influence on the
market, analysts said, the fact remained that the prices of
stocks will eventually fall if they are overvalued.

"These moves ... can go a lot further than people can
expect, but they end with a quick move back down," said David
Starr, vice president of quantitative analysis at Simpler
Trading. "People race for the exits very, very quickly."

Citron Research's Andrew Left, who sparked the conflict with
a call against GameStop, said Citron would no longer publish
short-selling research and would shift to writing on companies
that he thinks hold value.

"When we started Citron, it was to be against the
establishment, but now we've actually become the establishment,"
Left said in a video on Friday. "The Citron narrative is going
to change and have a pivot."

(Reporting by Sagarika Jaisinghani, Medha Singh, Sruthi
Shankar, Munsif Vengatill, Devik Jain and Anirban Sen in
Bengaluru; Fergal Smith in Toronto; Anna Irrera, Saqib Iqbal
Ahmed, Lewis Krauskopf, John McCrank, Chris Prentice and April
Joyner in New York; Susan Heavey in Washington; Sujata
Rao-Coverley, Tom Wilson and Thyagaraju Adinarayan in London;
Writing by Patrick Graham, Nick Zieminski and Sonya Hepinstall;
Editing by Saumyadeb Chakrabarty, David Gregorio and Daniel
Wallis)

Pearson

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