Wall Street's top brokers are quietly tightening their rules for who can bet against retail traders' most-popular meme stocks.
Goldman Sachs Group, Bank of America, Citigroup and Jefferies Financial Group are among firms that have adjusted their risk controls at prime-brokerage operations, according to people familiar with the moves. The banks are trying to protect themselves against fallout from extreme surges and dips that have characterized trading in companies including AMC Entertainment Holdings, MicroVision and GameStop.
The changes mean some hedge funds and other institutional investors now face higher collateral requirements or are limited from shorting certain stocks, the people said, asking not to be identified discussing internal policy decisions.
"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.
Representatives of Goldman, Bank of America, Citigroup and Jefferies declined to comment. It's not unusual for banks to adjust their risk controls as market conditions change.
The measures may change the fortunes of retail investors lighting up Reddit message boards with their forays into day trading. Increased margin requirements could hasten the short squeezes small investors have been rushing to capitalize on. 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.