(Reuters) - The U.S. Securities and Exchange Commission said on Friday that it has eyes on all parties involved in the ongoing fracas between hedge funds and an army of social media savvy investors, raising questions about what actions the agency could take.

Markets reeled this week from a meteoric rise in GameStop and other companies' share prices attributed to millions of retail investors teaming up on Reddit to take on Wall Street hedge funds that had been shorting the stocks. The SEC said in a statement that the agency is closely monitoring the situation.

Finn Dixon & Herling partner Andrew Calamari, a 17-year SEC veteran who led the regulator's New York office, spoke with Reuters on Friday about what the agency's next moves could be. The conversation below has been edited for clarity and brevity.

REUTERS: What are your concerns about the situation?CALAMARI: As expensive as it has been for the shorts, retail investors who may not actually be able to afford losses may be in for considerable ones, and I think that is dangerous. That is why the best use of the SEC's power would be to do a full court press on the dangers for investors.

REUTERS: Do you think the SEC has grounds to investigate this as market manipulation?

CALAMARI: I think it would be very, very hard, at least based on the facts as I understand them. Market manipulation in the legal sense is a very confined category. It basically means some kind of rigged trade, like a match trade or a wash trade where essentially a trader is trading with him or herself or a small group who have an agreement that there is no risk in the transaction.

REUTERS: What about fraud?

CALAMARI: If the one giving the rallying cry were lying, for example telling people to trade and not telling them he holds a position that is going to benefit, that would bring it more into the realm of classic securities fraud. Whether these types of nefarious activity are actually going on is something they will be looking at. But I think it's difficult to hang your hat on what [then-Federal Reserve Board chairman Alan] Greenspan described as "irrational exuberance," regardless of the motive.

REUTERS: Where does motive come in?CALAMARI: At least from the point of view of the hedge funds, these traders who are out there bidding up the stock are doing it with an expressed intent to punish them. But there is nothing illegal about that.

REUTERS: What do you see happening with the trading platforms including Robinhood, which are now coming under scrutiny for stopping retail investor purchases of some hot stocks yesterday?CALAMARI: Broker dealers don't have any obligation ever to accept an account or a trade. Generally speaking, as a matter of the securities laws, I don't think halting trading in a stock by a broker-dealer violates any rules.

There are some allegations that bigger investors in Robinhood were being harmed and that is why it took this action. I don't know that there is a basis for those allegations, which Robinhood has denied. I see rational economic reasons why Robinhood would not want to be saddled with this type of high-volume, high-volatility trading.

REUTERS: What if there were preferential treatment of one customer over another?

CALAMARI: That might raise some securities law issues. You have obligations under Reg BI to act in the best interests of all your clients.

REUTERS: Is there room for some sort of emergency rulemaking?CALAMARI: Whenever you tinker with one aspect of the market, there are all these cascading consequences that may be unanticipated. I would be interested to see what might be proposed, but I am skeptical that you are not going to end up doing more harm than good if you move too swiftly.