GameStop’s wild ride on the markets earlier this year was the result of an internet-fueled frenzy of investors, rather than nefarious activity, financial regulators ruled on Monday.
The Securities and Exchange Commission have spent months investigating the GameStop phenomena, that saw shares in the gaming stores rocket from less than $20 on January 12 to $483 on January 28, and released its 45-page report on the incident on Monday.
Driving each other on on a chatroom forum called WallStreetBets, the so-called ‘Reddit rally’ saw shares of GameStop surge 400 per cent in a week, before crashing back to pre-surge levels.
Questions were asked as to whether illegal acts were part of it, but on Monday the SEC said it was legitimate trading, and that the markets were shaken but withstood the pressure.
The report also confirmed that most of the trades were made by retail traders – people who buy shares for themselves. It added that hedge funds buying up shares in a bid to minimize losses were not largely-responsible for the price surge.
GameStop, a store supplying computer games and accessories, was struggling at the end of last year. In January the share price rocketed with an unprecedented rally, making some people huge amounts of money and losing vast quantities for others. The SEC has been investigating the wild ride to see if there were any illegal acts, but concluded on Monday that the surge was organic
Gary Gensler, chair of the SEC, had been widely expected to recommend aggressive structural changes to the way the American stock market works.
Gensler himself had suggested that some notable options were on the table — particularly regarding the way some popular retail brokerages, like Robinhood, are compensated by bigger Wall Street firms.
But the 45-page report did not ultimately recommend any policy changes, saying that the existing systems used to manage the financial markets held up well.
Gensler said they had instead offered some issues for further consideration, noting that ‘making markets work for everyday investors gets to the heart of the SEC’s mission.’
The SEC said that they were worried about the ‘game’ aspect of trading, with cartoons and memes and jokey emojis.
Gary Gensler, the chair of the SEC, is pictured testifying before Congress on September 14. In his long-awaited report he concluded that the GameStop rally was not the result of illicit activity and did not make any policy changes, although he highlighted issues of concern
‘Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,’ the SEC said.
They expressed concern at a practice known as ‘payment for order flow’, which is how apps such as Robinhood make their money, by taking a small fee for each transaction. The SEC said it encouraged the trading platforms to encourage more trades, often by jazzing up trades using enticing graphics to make the process more game-like.
‘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 SEC officials said.
The SEC also said showed the importance of brokers having enough liquidity to back up their trades.
Amid the late-January chaos in GameStop trading, Robinhood had to temporarily suspend trades – enraging some of their clients – to ensure that they had enough financial resources to back up the deals.
‘This episode highlights the integral role clearing plays in risk management for equity trading, but raises questions about the possible effects of acute margin calls on more thinly-capitalized broker-dealers and other means of reducing their risks,’ SEC’s report said.
‘One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.’
GameStop trading became a way for small scale investors to ride a wave of the markets. Some managed to judge it correctly, but many came crashing back to earth
Vladimir Tenev, the co-founder and co-CEO of Robinhood, is seen in May 2016. He has insisted that Robinhood acted at all times during the frenzy in the best interests of the app’s users
Robinhood welcomed the report, and said it offered useful ideas.
A Robinhood spokeswoman noted in a statement that the agency’s report ‘highlights opportunities to modernize market structure for the benefit of retail investors, including shortening the settlement cycle and potentially removing sub-penny limitations.’
The unusually large amount of short selling in GameStop sparked speculation of ‘naked’ shorting – selling shares without arranging to borrow the underlying security.
When a naked short sale occurs, the seller fails to deliver the securities to the buyer.
But the SEC concluded that the practice had not been a problem.
‘Based on the staff’s review of the available data, (GameStop) did not experience persistent fails to deliver,’ the SEC said.
They found that the phenomena was driven by public interest, rather than chicanery.
By January 27, the number of unique accounts trading GameStop on a given day had reached 900,000 compared with 10,000 at the beginning of the month, the SEC said.
GameStop shares closed on Monday at $186 – a 1,000 per cent increase on the price at the beginning of the year
They also confirmed that the frenzy was not limited to day traders and other small scale investors.
Institutional investors, including several hedge funds, also purchased shares of GameStop, the SEC found.
Some of those purchases may have been partly driven by hedge funds that had betted against GameStop, trying to cover their positions, and some of those funds made bad losses.
In contrast, some funds that were long GameStop cashed in.
‘Some investors that had been invested in the target stocks prior to the market events benefited unexpectedly from the price rises, while others, including quantitative and high-frequency hedge funds, joined the market rally to trade profitably,’ the SEC wrote.
GameStop shares closed on Monday at $186, and remains up more than 1,000 percent since the start of the year.