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

Wall Street is sticking it to… the man?

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.

Of course, hedge funds will merely find new and more creative ways to short, such as using puts or even TRS. Ironically, with this decision prime brokers may hasten the emergence of even more Archegos-style blowups now that hedge funds will be force to hide their short exposure under the table.

For now, however, keep a close eye on the most popular heavily shorted meme names, which according to S3, are:

• GME with 11.14MM shares shorted or 19.55% of float
• AMC with 89.9MM shares shorted or 18.05% of float
• TSLA with 39.23MM shares shorted or 5.06% of float
• BB with 48.14MM shares shorted or 8.63% of float.

The news prompted a modest bounce in AMC shares from session lows, but nothing close to the massive ramps observed earlier this week.