The local stock market sheriff, the Australian Securities and Investments Commission (ASIC), is on the lookout for a break out of war between local, small retail investors and hedge fund short sellers.

That follows the battle on US stock markets between short sellers and a group of investors called WallStBets, who have a forum on the Reddit website.

This share market skirmish saw the share price of video store business, GameStop, spike 400% last week and ASIC doesn’t want this to happen here with well-known shorted stocks such as Webjet, Mesoblast, Flight Centre and many more.

These ‘smarty’ Reddit investors have effectively colluded to take on short sellers, who target vulnerable companies, put out negative reports and then sell the shares off to make money at the expense of those investors who are often buyers and keepers of stocks.

These Reddit investors decided to combine to buy these stocks using options, which might mean you only have to put a small percentage down as a deposit on a stock purchase but if you want you can walk away from the deal at no extra cost.

These people were even borrowing to take on the short sellers and some reports suggest that some used their stimulus cheques to buy stocks!

Interestingly, there is a report that says this is a new version of the Occupy Wall St Movement, which was a group hellbent on crippling the big end of town fund managers and financial institutions after the GFC’s Great Recession in the US.

In case you missed it, this isn’t just a GameStop battle, as other stocks such as AMC Entertainment and Bed Bath and Beyond have also been targeted by the WallStBets group.

And it’s now a dilemma for ASIC. On one hand, it’s good that the little guys are taking on and beating short sellers, who largely play unfair. But if these smaller investors use collusion, it can’t be accepted by the regulator.

This table above from The Switzer Report shows some of the biggest shorted stocks in Australia, and if share price action in these becomes very noticeable, ASIC will undoubtedly take action.

Fortunately, small Australian investors don’t have the same options products that the Yanks have but it doesn’t mean collusion between investors to take on short sellers can be ruled out.

But this potential intervention by ASIC to stop small investors sticking it to short sellers raises the question: is the regulator doing enough to control the behaviour of hedge funds and their short-selling ways?

Many quarters of the investing community want short sellers to be looked at more critically to see if they’re unfairly influencing the market to purely make money at the expense of smaller, less influential investors.

We’ll never see short selling banned but questions have to be asked when reports are manufactured overseas and released there but then shared with the local media to sink a company’s share prices.

Investors want and need to know that some official body, such as ASIC, is critically examining the behaviour of short sellers and their impact on the market.

How the US regulators handle this revenge of the nerd/online investor will have a big bearing on where stock prices head in coming weeks. Locally we were expecting a good reporting season that starts this month but this Reddit drama could put a black cloud over a number of companies.

On the other hand, some shorted companies might find a few friends prepared to bet against the short sellers. This stock market war isn’t over yet.