Why regulators may scrutinize Reddit's GameStop gambit

It may have been long dismissed as “dumb money,” but the GameStop saga has shown how retail traders can make stocks move in ways that defy logic.

Shares of the video game retailer surged nearly 700% over the past week after a group of so-called "Reddit bros" took on hedge fund pros.

As such, the stock’s interstellar surge has sparked calls for regulatory scrutiny.

Danilo Kawasaki is the co-founder of investment firm Gerber Kawasaki.

“I think that this it impacts the integrity of the market ... I think that regulators need to step in and and figure out how to regulate this a little better, ganging up on a short squeeze to make a quick profit. It's not really what capital markets are for.”

U.S. law bars the spread of false or misleading information designed to manipulate investors into buying or selling of securities, like that seen during a rash of "pump and dump" schemes during the early 2000s dot.com boom.

Regulators are likely to explore whether Reddit was used in a similar way.

Jeff Tomasulo is the CEO of Vespula Capital.

"It's very reminiscent of 1999 and the dotcom era, because does GameStop really have a valuation of $160 a share, per stock, or $100? Absolutely not. But there are people out there are are trading and speculating and that's why they're pushing these stocks up higher [...] I don't even call it investing. It's really kind of speculating in these types of stocks.”

The U.S. Securities and Exchange Commission said it was aware of the market volatility and was assessing the situation.

Experts say the agency will likely look at whether the messaging was manipulative by both investors holding the stock long-term and activists betting against it.

Wild swings in GameStop's shares led the New York Stock Exchange to halt trading in the company several times.

Lawyers say there was sufficient confusion to warrant a longer suspension.

It could prompt a broader review of share suspension rules.

The GameStop incident has also shone a spotlight on low-cost retail trading platforms.

Now anyone with a smartphone can trade stocks for free, prompting millions of ordinary Americans to dabble in investing.

There are consumer protection concerns that many do not properly understand the risks.

Analysts warn chatroom chatter is fuelling huge and irrational share price moves, raising concerns of it upending the market if not properly policed.