The Securities and Exchange Commission (SEC) released its much-anticipated report on the GameStop frenzy, “the most famous meme stock, which raised questions about market structure and investor protections at the beginning of the year.”
The 44-page “Staff Report on Equity and Options Market Structure Conditions in Early 2021” examines the way meme stocks experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual investors filled social media.
As the companies’ share prices skyrocketed to new highs, increased attention followed, and their shares became known as “meme stocks.” Then, as the end of January approached, several retail broker-dealers temporarily prohibited certain activity in some of these stocks and options, according to the report. Game Stop stock (GME) experienced a confluence of all of the factors that impacted the meme stocks, including large price moves, large volume changes, large short interest, frequent Reddit mentions and significant coverage in the mainstream media, the report said. It also reiterated Chair Gary Gensler’s criticism of the so-called payments for order flow.
“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” according to the report. “In addition, payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices.”
When its customers buy and sell stocks and options, trading platforms such as Robinhood, for example, route those orders to high-speed traders, such as Citadel Securities, which pay for the right to execute many of those trades. The process is called payment for order flow — a practice that has been under scrutiny.
The practice has boosted Robinhood’s earnings, as it made $331 million from customers’ trading activity in the first quarter — more than triple the $91 million earned in the first quarter of 2020 from the so-called payment for order flow, as previously reported by GOBankingRates.
In an emailed statement to GOBankingRates, Robinhood said that “the SEC staff’s report highlights opportunities to modernize market structure for the benefit of retail investors, including shortening the settlement cycle and potentially removing sub-penny limitations. We look forward to continuing to engage with the SEC to ensure the markets remain accessible and affordable for all.”
The report concluded that while the extreme volatility in meme stocks in January 2021 tested the capacity and resiliency of securities markets, “it also highlighted an important feature of United States securities markets in the 21st century: broad participation.”
“These events present an opportunity to reflect on the market structure and regulatory framework and identify additional areas for potential study and further consideration in the interests of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation,” according to the report.
The SEC’s report concludes with no policy changes, but by identifying areas of market structure that might need more regulatory framework for potential study and additional consideration. They include forces that may cause a brokerage to restrict trading; digital engagement practices and payment for order flow; trading in dark pools and wholesalers; and the market dynamics of short selling. A senior SEC official who spoke to reporters before the report’s release said it was intended only to outline the events surrounding the meme stock trading, but not directly recommend any specific changes, the New York Times reported.
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Last updated: October 19, 2021