SEC GameStop Report Debunks Conspiracies

SEC GameStop Report Debunks Conspiracies

The eagerly-awaited SEC report on the January GameStop frenzy was released on Monday, and it debunks conspiracy theories spun out on social media as well as bolsters SEC Chair Gary Gensler’s push to toughen regulations, says an article in Bloomberg.

While the report doesn’t offer specific policy recommendations, it lists four areas that warrant a additional study:

  • Factors that might push thinly-capitalized brokers who can’t meet margin calls to restrict trading
  • Digital engagement practices—such as game-like apps that increase trading—and payment for order flow
  • Dark pools and the impact of market makers like Citadel that execute transactions themselves instead of sending them to stock exchanges
  • Short selling

These four areas were already in Gensler’s sights as part of an aggressive agenda that could entangle hedge funds, the article contends.

But the report also debunked a key narrative of the GameStop incident, that hedge funds were betting against stocks driven sky-high by a massive short squeeze. According to the report, evidence doesn’t back up that story; GameStop purchases covering shorts was but “a small fraction of the overall buy volume” and that the main motivation for that huge buy volume couldn’t be determined. The report also noted that most hedge funds escaped from the frenzy unscathed.

Another main question that was addressed in the report was whether Robinhood restricted customers from adding to their GameStop positions as the stock surged. Robinhood has insisted that it halted buy orders because of demands from its clearinghouse to post more capital in order to handle the elevated risk, and the report does back up that claim.

Gensler has indicated that he plans to tackle many of the issues raised in the report. The SEC may propose regulations by April that target payment for order flow and the dominance in the market of firms that execute orders, and it just completed its compilation of public comments in regards to brokers’ digital engagement practices.