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Why did the SEC release a report on GameStop?

Stock MarketsOct 18, 2021 07:20PM ET
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© Reuters. FILE PHOTO: The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst/File Photo

(Corrects paragraph 6 to clarify that Schwab did not restrict buying or selling of GameStop's shares, but that it adjusted margin requirements and restricted certain advanced options strategies)

By John McCrank

NEW YORK (Reuters) -The U.S. Securities and Exchange Commission on Monday released a report examining the frenzied trading in shares of retailer GameStop Corp (NYSE:GME), and other 'meme' stocks, in January, and recommended some areas for further regulatory consideration.

The report could have implications that affect where retail stock orders are executed and how that service is paid for, when brokers can restrict trading, and the amount of transparency around short sales.

Here are some key details from the GameStop saga:

WHAT HAPPENED?

Shares of GameStop surged more than 1,600% in January as retail investors colluded in online forums like Reddit's WallStreetBets to try to bid up the heavily shorted stock and force hedge funds to unwind their bets against it, with the hope the short squeeze would drive the price even higher.

The extreme volatility in GameStop shares, along with other popular meme stocks, prompted the clearinghouse that guarantees trades before they are completed to raise the collateral from brokers to clear the trades.

That led several brokerages, including Robinhood (NASDAQ:HOOD) Markets, to temporarily restrict trading in the red-hot stocks, helping curb the rally, infuriating retail traders and rattling market confidence. Others, like Charles Schwab (NYSE:SCHW) Corp, adjusted margin requirements and limited advanced options strategies on the affected stocks.

WHY THE SURGE IN RETAIL TRADING?

In late 2019, large retail brokers like Schwab and Fidelity followed Robinhood's lead and eliminated trading commissions.

Then, in early 2020, with COVID-19 lockdowns keeping people at home, major entertainment and sporting events canceled, and government stimulus checks sent to many U.S. households, retail trading levels soared.

While the main narrative around the GameStop frenzy was retail investors taking on big hedge funds, institutional investors were also major players in the buying and selling.

WHO WAS HURT?

Hedge fund Melvin Capital required a $2.75 billion lifeline when it had to close out its short position in GameStop at a huge loss in January.

Anybody who bought GameStop shares at $482.95 on Jan. 28 and then sold them since would have lost money.

GameStop shares are currently at $183.28, around 1,275% higher than they were a year ago.

WHAT HAS HAPPENED SINCE?

- Congress held several hearings on the GameStop episode;

- The SEC has asked for public comments on the effects of the "gamification" of trading apps and whether the public is at risk;

- The main post-trade utility for U.S. stocks has recommended shortening the settlement cycle for stock trades to one day after the trade happens, from two days;

- Various companies and industry groups have made recommendations on improving transparency around the execution of retail orders.

Why did the SEC release a report on GameStop?
 

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Comments (6)
Grape Ape
Grape Ape Oct 19, 2021 7:20AM ET
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I'm so completely exhausted with this overplayed "protect the public" BS. If you ACTUALLY want to protect us, then enforce the laws on rich people with the same zeal and ferocity you do on poor people in this country.
ian manro
ian manro Oct 19, 2021 2:37AM ET
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The fact that the top 11% in the US own almost 90% of stocks it is not an issue for SEC. A crappy stock like GameStop ana retail investor making money on it became a problem for Congress.All the options trades on GameStop placed by Renaissance Technologies (RT) were not even mentioned.When RT pushed TSLA to a high sky valuation presented no issue for SEC or Congress. Hmm...
James Pattison
James Pattison Oct 18, 2021 10:41PM ET
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Why is it collusion when a bunch of individuals buy the same stock thats shorted way too much… and not when huge hedgefunds all buy the same stock? Or when market makers all simultaneously only allow sell orders on a stock at the same time? Cant believe this didnt expose the market more for being fixed against the individual
Kaveh Sun
Kaveh Sun Oct 18, 2021 10:19PM ET
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The reason : the media is helping the rich to clean mom n pop investors. The media is trying to keep people away from doing their own investing. 99.99% fund maagers get rich from fees, not from investing.
kangroo kiloo
kangroo kiloo Oct 18, 2021 10:19PM ET
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you are right
Oludofin Cosmos
Oludofin Cosmos Oct 18, 2021 8:49PM ET
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hello
Daniel Smith
Daniel Smith Oct 18, 2021 7:45PM ET
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all I can say is thanks for the lesson, the education I got from this was worth every dollar lost
 
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