#Potential regulations on hedge funds over GameStop frenzy is not prudent

New counterproductive regs on hedgies? 

There will undoubtedly be a regulatory response to the insanity surrounding GameStop and a few other one-time penny stocks. 

And it’s easy to see why: Only a few weeks ago shares of Game­Stop, along with Blackberry and AMC theaters, were trading as if their best days were behind them. Today they are trading so high and with so much volatility that most firms have placed limits on how much of this stuff you can buy and sell. 

The SEC is investigating the mess, and AOC is agreeing with Ted Cruz that something is wrong with our markets. 

The fear, of course, is that when the reality about these companies sets in, everyone will sell at once and the only buyers will be those willing to pay just pennies on the dollar. People will lose their shirts. 

Instead of prudent investing, people might opt to keep whatever money they have under their mattress. 

How these penny stocks found miraculous and likely fleeting new life as market darlings highlights the blind spots in ­today’s markets — and society. And they’re not easily regulated away. 

Technology allows anyone to buy and sell stocks almost seamlessly through apps like Robinhood. And the Fed’s zero-percent interest-rate policy encourages investors to borrow heavily and cheaply to enhance their positions and take outsized risks because buying a muni bond just doesn’t provide enough returns. 

Vast swaths of the country are still in lockdown mode. People have lots of time on their hands to gamble and grumble about the sorry situation. Message boards and social media have replaced picnics and dinner parties. 

Venting is more extreme on the Internet. That’s why the GameStop mania, which began with some optimistic comments by an activist investor about the company’s future, soon turned into a populist uprising. 

Day traders chatting on message boards figured they could make more money buying these stocks because they were heavily shorted by some rich hedge-fund types who believed GameStop was never coming back and was likely to fall back into penny-stock territory. 

They created a short squeeze because in a short sale you borrow stock and sell those shares, betting you will repay the lender at a lower price. But if prices spike, you must start buying those shares to repay your loan. That’s exactly what happened here and drove shares of Game­Stop, etc., nearly putting a major hedge fund out of business. 

You might be asking: Haven’t our markets always been a casino? Well, yes and no. Sure, people wager bets in buying or selling stocks, but it’s often based on some degree of analysis. 

Smart traders sometimes lose money even after rigorous research, but they are also able to stay in business by making more money than they lose because logic and analysis always prevail over simply rolling the dice. 

So, what should we do? New SEC chief Gary Genlser is coming up with some answers as I write this, and they will probably involve investigations and reprisals against Robinhood, the free trading app used by small investors to buy the stocks at the center of the crisis. 

Robinhood’s alleged sin: Locking down trading in Game­Stop this week at the height of the mania. Cruz and AOC took offense at this because, based on their reading of the events, Robinhood was helping its hedge-fund friends survive the day-trading rebellion. 

The logic here is absurd on several levels, including the fact that the more people trade, the more money Robinhood makes when it sells its order flow to brokerages to match buyers and sellers. 

It also ignores the reality that Robinhood, like many other outfits, couldn’t keep up with the buying and selling from a settlement and regulatory standpoint. 

That’s why Robinhood rushed Friday to raise $1 billion — it didn’t have the capital to settle trades. 

Massachusetts Sen. Elizabeth Warren — the anti-business crank now part of the new Senate Democratic majority — recently offered her two cents, which would be funny if she weren’t so powerful — and dangerous. 

In her worldview, the culprits aren’t stock-market touts pushing the prospects of GameStop beyond all rationality through message boards on Reddit. 

The real culprits are “hedge funds, private-equity firms and wealthy investors” who have been given a free pass by regulators at the SEC for far too long, treating “the stock market like their own personal casino while everyone else pays the price.” 

My guess, and the guess among Wall Street executives, is that she is looking for a reason to regulate hedge funds, and maybe end short selling altogether. But short sellers are usually the people who alert the regulators to massive market frauds, as was the case in the Enron scandal and many others. 

Does Warren really want to be responsible for the next Enron? 

Sorry, policy makers, the real gamblers in this fiasco weren’t the hedge funds — they based their short thesis for these companies on research that showed most people weren’t using Blackberrys any longer. 

The gamblers today are small investors with time on their hands. Try regulating them and you’ll have a real populist rebellion.