Following its highly anticipated review into the events surrounding the "meme stock" trading saga in January, the Securities and Exchange Commission determined that the "bullish sentiments" of individual investors on social media platforms like Reddit were primarily responsible for the unprecedented surge in GameStop's share price.
Not nefarious actions.
"The extreme volatility in meme stocks 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, the trading in meme stocks during this time highlighted an important feature of United States securities markets in the 21st century: broad participation."
Ticker Security Last Change Change % GME GAMESTOP CORP. 185.94 +2.82 +1.54%
According to the SEC, the number of investor accounts trading GameStop on a given day rose to almost 900,000 in late January from less than 10,000 at the beginning of the month. Shares of GameStop soared approximately 2,700% between its intraday low on Jan. 8 and its intraday high on Jan. 28.
While the agency acknowledged that short sellers closing out their positions on GameStop contributed to the video game retailer's stock price increase at the time, 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 squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock.”
– Securities and Exchange Commission
"Whether driven by a desire to squeeze short-sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock," the agency added.
Ticker Security Last Change Change % HOOD ROBINHOOD MARKETS, INC. 40.65 -0.38 -0.93%
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.
"In their customer account agreements, some broker-dealers reserve the right to decline customer orders or cancel trades without prior notice," the SEC said. "Such actions could be taken, for example, for legal, compliance, or risk management reasons."
In addition, the SEC found no evidence of a gamma squeeze, where market makers purchase a stock to hedge the risk associated with writing call options on that stock, or "naked" short selling, where hedge funds sell without arranging to borrow shares.
Rather than offering specific policy recommendations, the SEC said the events provide "an opportunity to reflect" on market structure issues, such as digital engagement's impact on retail investor behavior, payment for order flow, trading in dark pools and through wholesalers, and short selling.
Chairman of the Securities and Exchange Commission Gary Gensler argues the industry will not ‘reach any of its potential if it tries to stay outside’ of U.S. laws.
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-like 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 improved reporting on short sales could help the agency better monitor the relationship between shorting and stock price dynamics.