NEW YORK: The US Securities and Exchange Commission on Monday released a report investigating frenzied trading in shares of retailer Gamestop Corp and other ‘meme’ stocks in January, and recommended certain areas for further regulatory consideration.
The report can have implications that affect where retail stock orders are executed and how that service is paid, when brokers can restrict trading, and the amount of transparency around short sales.
Here are some key details of the GameStop saga:
What happened?
Shares of GameStop rose more than 1,600% in January as retail investors tried to bid up the stock heavily short in online forums such as Reddit’s WallStreetBets and forced hedge funds to open up their bets against it. Plus that low squeeze will drive the price higher.
The extreme volatility in Gamestop shares, along with other popular meme stocks, prompted clearinghouses that guarantee trades prior to completion to raise collateral from brokers to clear trades.
This prompted several brokerages including Robinhood Markets and Charles Schwab Corp to temporarily restrict trading in red-hot stocks, curbing the rally, angering retail traders and undermining market confidence.
Why the boom in retail?
In late 2019, large retail brokers such as Schwab and Fidelity followed Robinhood’s lead and eliminated trading commissions.
Then, in early 2020, with COVID-19 lockdowns to keep people at home, major entertainment and sporting events cancelled, and government stimulus checks sent to many American homes, retail trade scaled up.
While the main narrative around the GameStop frenzy was retail investors taking over large hedge funds, institutional investors were also major players in buying and selling.
Who was hurt?
Hedge fund Melvin Capital was in need of a $2.75 billion lifeline when it had to close its short position at Gamestop with huge losses in January.
Anyone who bought GameStop shares on January 28 for $482.95 and then sold them would lose money.
Shares of GameStop are currently at $183.28, up about 1,275% from a year ago.
What has happened since then?
– Congress held several hearings on the GameStop episode;
– The SEC has asked for public comments on the effects of “gamification” of trading apps and whether the public is at risk;
– The main post-trade utility for US stocks recommends shortening the settlement cycle for stock trades from one day after the trade, to two days;
Various companies and industry groups have made recommendations to improve transparency in the execution of retail orders.
Disclaimer: This post has been self-published from the agency feed without modification and has not been reviewed by an editor
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