GameStop's stock spike was not caused by short-selling: SEC report

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GameStop's stock spike was not caused by short-selling: SEC report

WASHINGTON Reuters - The U.S. markets played well during January's GameStop volatility, while short selling was not the main cause of the unprecedented rise in the'meme stock according to a long-awaited SEC report.

The report released on Monday provides a post-mortem into how amateur traders using commission-free retail brokerages drove shares in GameStop and other popular meme stocks to extreme highs, squeezing hedge funds that had bet against them.

Amid the intense volatility, several brokerages restricted trading in affected stocks, curbing the rally, infuriating retail traders, sparking outrage from policymakers and leading to a congressional hearing.

Despite the basic series of events, an SEC official concluded that the basic plumbing of the market remained sound, an SEC official said. The report also found that video game retailers GameStop's positive sentiment on video game retailer GameStop was the main driver of GameStop's stock spike and not dislocations caused by short selling.

Short sellers borrow shares from brokers and then sell them on the market, with the agreement that they will buy the shares back and return them to the lender at a later date. If the price has fallen, the short seller can buy the shares back at a lower price than they paid for them, locking in a profit

When a heavily shorted stock soars, short sellers are forced to buy the shares back at higher prices to close out their positions, pushing the stock even higher - known as a short squeeze. However, the SEC found that it was the positive sentiment, not buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock. It also rebutted an unusually high theory, which was driven by the unusually high volume of short selling in GameStop, that some hedge funds were 'naked' shorting the stock - selling without arranging to borrow shares. The SEC has said it found no evidence of this.

The report does not address several outstanding questions, including whether bad actors manipulated social media to whip up positive sentiment in GameStop, or whether hedge funds tried to pressure retail brokers to restrict trading in GameStop, something that all parties concerned have denied.

An SEC official said it could not discuss in the report misconduct that could result in a potential enforcement action.

The agency's chairman Gary Gensler told Congress earlier this year that the agency would address other issues raised by the agave, including short selling disclosures, game-like trading prompts used by brokers and brokers' practice of sending customer orders to wholesale market makers for a fee.

January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as efficient, orderly and efficient as possible, Gensler said in a Monday statement.