A highly anticipated U.S. Securities and Exchange Commission's January report on GameStop Corp. trading debunked some conspiracy theories that have swirled around social media for months, while adding momentum to Chair Gary Gensler s push to toughen rules.
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The 44 page document - released on Monday - details the SEC assessment of one of the most remarkable periods in the pandemic economy, when retail traders called onto Wall Street and sent shares from GameStop and other meme stocks into the stratosphere.
Agency officials did not offer specific policy recommendations, but they did say the episode warranted a close look at factors that prompt brokers to disable customer trading, video game - like features popularized by online trading platforms, short-selling and payment for order flow. All are areas where Gensler says that the SEC might have to strengthen regulations as part of an aggressive agenda that could lead hedge funds, Robinhood Markets Inc. Citadel Securities and other firms to ensnare hedge funds,
They did so by flooding the market with purchase orders, pushing GameStop even higher to expect hedge funds to buy shares to cover their shorts.
Yet the SEC said that the story isn t entirely backed up by evidence. Gamestop purchases by those covering shorts were a small fraction of overall buy volume and the company's share price remained high even after the direct effects from such trades should have waned, according to the regulator.
The underlying motivation of such buy volume cannot be determined, the SEC said. Whether motivated by a desire to squeeze short sellers and therefore to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was positive sentiment, not the buying-to-cover, that sustained the week-long price appreciation of GameStop stock. The biggest victim of bullish investors that gathered together on Reddit and other social media platforms to push GameStop higher was Gabe Plotkin's Melvin Capital. The hedge fund had a big short on GameStop and its January losses led to the firm getting a $2 billion cash infusion from Steve Cohen's Citadel and roughly $750 million from Ken Griffin s Point 72 Capital Management. Still, the SEC said hedge funds mostly emerged from the situation unscathed.
Staff believes that hedge funds were generally not significantly affected by investments in GME and other meme stocks, the regulator said in its report. Staff did not observe that any advisers to registered funds and private funds experienced liquidity difficulties or difficulties with counterparties. One hotly debated topic also addressed in the SEC report, albeit less definitively, is whether hedge funds helped Robinhood to demonetize customers from adding products to their GameStop positions in January and as stock on that track burst.
Robinhood has repeatedly argued that it halted order orders due to demands from its clearinghouse that it post more capital to deal with the heightened risk. The issue was a top priority when Robinhood Chief Executive Officer Vlad Tenev faced a barrage of questions from lawmakers during February House hearings.
The document listed four areas that the SEC deems need additional study.
None Factors that may prompt brokers to enforcing trading:
None The SEC said that Wild GameStop trading raises questions about thinly capitalised brokers ability to meet margin calls. The SEC said such risks could be mitigated by shortening settlement cycles for trades.
One, none.
None The SEC questioned whether payment for order flow incentivizes online brokers to incorporate game-like features into their apps to increase customer trading.
None.
None The SEC may review the impacts of market makers like Citadel Securities and Virtu Financial Inc. on the market and trade execution that retail customers receive. Such firms paid brokers for the right to execute many of the GameStop orders.
None of these is directed to any user.
None The SEC said expanded disclosure of bearish bets on stocks would help regulators track market dynamics better.
January's events gave us an opportunity to consider how we can further our efforts to make equity markets as efficient, proper and orderly as possible, Gensler said in a statement accompanying the report.
The SEC chief has indicated that he plans to take up many of the issues raised in the document. Notably, the agency signaled that it may propose rules for April targeting payment-for-order flow and market dominance of firms that execute orders. The brokerage also had finished gathering public comments on digital engagement practices.
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