After its highly anticipated review into the events surrounding the meme market trading saga in January, the Securities and Exchange Commission determined that the unprecedented sentiments of individual investors on social media platforms like Reddit were primarily responsible for the bullish surge in GameStop's share price.
The extreme volatility of the stock market in January 2021 tested the capacity and resiliency of our securities markets in a way that few could have anticipated, the SEC wrote. At the same time, trading in meme stocks during this period highlighted an important feature of United States securities markets in the 21st century: broad participation. According to the SEC, the number of investor accounts trading GameStop on a given day rose from less than 10,000 at the beginning of the month to almost 900,000 in late January. Shares of GameStop overtook the intraday low of 1,700% between its intraday high on Jan. 8 and its intraday low on Jan 28.
While the agency acknowledged that short sellers closing out their positions on GameStop contributed at the time to the video game retailer's stock price increase, they argued that such buying was a small fraction of overall buy volume and that GME share prices continued to be high after the direct effects of covering short positions would have waned. Whether driven by a desire to make long sellers and thus profit from the consequent increase in price, or by belief in the fundamentals of GameStop, it was positive sentiment, not the buying-to-cover, that supported the weeks-long price appreciation of GameStop stock, added the agency.
The agency also poured cold water on a popular theory that brokerages like Robinhood Markets were pressured by hedge funds and wholesalers to restrict trading on GameStop and other meme stocks.
Some brokers reserve the right to cancel customers orders or decline trades without prior notification, the SEC said. Such actions can be taken for example for legal, compliance, or risk management reasons. In addition, the SEC found no evidence of a naked snap where market makers purchase a stock to hedge risk associated with writing call options on that stock, or gamma short selling, where hedge funds sell stocks without arranging to borrow shares.
The agency believes that shortening the amount of time it takes for brokers to clear equity trades could help mitigate market risk during heightened volatility going forward. The SEC also said consideration should be given to whether game features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise. In addition, the agency argued that improved reporting on short sales could help the agency monitor the relationship between shorting and stock price dynamics.