WallStreetBets-fueled rise in GameStop stock market frenzy: SEC report

The Securities and Exchange Commission released a 45 page report on Monday offering no specific policy recommendations after GameStop GME stock's early 2021 frenzy.

The report leaves the door open to additional consideration on matters like the digital engagement practices that brokerages may be using to glorify risky stock trading.

Robinhood HOOD for example, drew scrutiny for using digital confetti to celebrate trades, a practice that it abandoned as some criticize brokerages for actively encouraging gambling.

The report says these practices may be incentivized by the industry model of payment for order flow, where brokerages route wholesale orders through market-makers. Gary Gensler, Chair of SEC, has not ruled out the possibility of a full ban on the model.

The SEC also suggested that better disclosures on short positions be required to better monitor controversial price dynamics, as well as shorter settlement cycles that could reduce the likelihood of brokers having to impose short trading restrictions.

The SEC staff said the agency s job is to provide efficient, fair and efficient markets — not to stamp out price volatility.

People may disagree about the prospects of GameStop and other meme stocks, but those disagreements are what should lead to price discovery rather than disruptions, the report reads.

Senior SEC staff said the report was not designed to make specific policy actions, making it unclear if there are immediate implications for the SEC's approach to the brokerages, hedge funds, clearinghouses or wholesale market makers engulfed in the episode.

Most of the staff report recaps the WallStreetBets-fueled rise in GameStop stock in January 2021. Short sellers were forced to cover positions as more investors piled into the meme. In a matter of days, shares of GameStop, a long-spending video game retailer, had over 2,000% exploded.

A lot of controversy lies in what happened after the initial pop.

Some brokers started imposing restrictions on the ability to sell meme stocks — but not buy? The likes of Barstool s Dave Portnoy started sparking theories about hedge funds and wholesalers pressuring brokers to stop the run up in meme stocks.

The SEC report suggests otherwise, noting that margin calls and capital charges assessed by clearing firms that actually settle trades themselves forced brokerages to restrict trading.

The SEC noted, however, that clearing requirements were not behind all the restrictions. For one unnamed brokerage, capacity issues in generation of unique IDs for stock orders apparently pushed it to restrict customers from buying GameStop and cinema chain AMC, another meme stock, for a brief period.

The report also casts doubt on the idea that GameStop prices were driven by market makers i.e. Citadel Securities buying stock to hedge against options contracts that they themselves wrote called a gamma squeeze The SEC also ruled out the role of naked short selling in GameStop price dynamics, insisting that GameStop did not experience persistent problems with trades actually clearing.

Staff report concludes by noting that the modern feature of broad participation remains a critical feature of securities trading in the critical era, reminding market participants what is at stake when price volatility arises.

Underneath the memes are actual companies, with employees, customers, and plans to invest in the future, reads the report.

Brian Cheung is a reporter covering banking for Yahoo Finance. You can follow him on Twitter bcheungz.