The Securities and Exchange Commission (SEC) released its highly anticipated report on Monday on the GameStop mania which hit the markets in January 2021.
Wall Street’s main regulator did not offer any new rules or regulations. Instead, the 44-page report details the several red flags raised during the affair and other issues such as the gamification of trading.
“January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible," SEC Chair Gary Gensler said in a press release. "Making markets work for everyday investors gets to the heart of the SEC's mission. I would like to thank the staff for bringing their expertise to this important report, and for their ongoing work to address the issues that January’s events raised."
Despite the desire of some investors for the SEC to blame someone for the GameStop affair, agency officials said in the report that the question is outside their scope because more than 100 equities experienced the same phenomenon.
"In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record. The report, however, finds no causal connection between the meme stock volatility and conflicts of interest, payment for order flow, off-exchange trading, wholesale market-making, or any other market practice that has drawn recent popular attention," Commissioners Hester Peirce and Ebad Roisman said in a joint statement.
The report also linked offline factors, such as Chewy’s co-founder Ryan Cohen disclosing an investment in GameStop before joining its board of directors, for the share’s significant price movement in January 2021.
While the price increases coincided with the growing online interest in GameStop, the report says there was also significant interest from financial institutions and hedge funds.
The SEC also described GameStop’s price movement as “not unusual for January 2021.”
“For instance, single-day price changes on January 27 from the closing prices on January 26 for KOSS (480%), AMC (301.2%), NAKD (252.3%), and Express, Inc. (symbol: EXPR) (214.1%) were larger than any single-day GME price change. In fact, since 2020 began, 134 common stocks had at least one one-day price increase greater than GME’s largest one-day price increase,” the report says.
Profit from retail investor activity
Instead of laying blame for the GameStop saga, the agency took to task the relationship forged between many brokers and market makers to profit off the growth of retail investor activity.
“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” the report said.
The report described how some brokers coaxed additional investments out of retail investors, which include confusing the terms “free” trading “ and “no commissions.” Others use promotional or reward programs as well, the report said.
Even with these deals in place, the report added that broker-dealers often resort to other means of making revenue from retail trading volume. Some examples include requiring payments for order flow, advisory services, or interest earned on margin loans.
One of the most notable demographics that broker-dealers often target with these offers are investors under the age of 40 and with accounts valued at under $100,000.
While the report did not offer any new regulations, Commissioners Pierce and Roisman left the door open for future initiatives.
"We always should be on the lookout for ways to improve our rules and our markets, but we must move with the utmost care to ensure we do not harm investors and impair markets that are integral to people’s lives and retirement, as well as the US economy. Investors and issuers, whom the equity market is after all here to serve, deserve nothing less," they said.