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'Meme' stock prices may not properly reflect demand - NYSE president

Published Jun 16, 2021 06:01PM ET Updated Jun 16, 2021 09:26PM ET
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By John McCrank

NEW YORK (Reuters) - The prices of so-called meme stocks may be distorted because the majority of trades in those names are executed away from public exchanges where share price formation occurs, the head of the New York Stock Exchange said on Wednesday.

"Meme stocks," which often start as low-priced, highly shorted stocks that users of online forums such as Reddit's WallStreetBets rally behind, are some of the most heavily traded and volatile shares on any given day.

Shares of companies like video game retailer GameStop Corp (NYSE:GME) and theater chain operator AMC Entertainment (NYSE:AMC) have whipsawed this year, with GameStop having rallied more than 1,600% in January alone, prompting trading halts by some brokers and sparking Congressional and regulatory hearings.

"In some of the meme stocks that we've seen, or stocks that have a high level of retail participation, the vast majority of order flow can trade off of exchanges, which is problematic," said Stacey Cunningham, president of Intercontinental Exchange (NYSE:ICE) Inc's NYSE.

"That price formation is not really reflective of what supply and demand is," she said at a conference hosted by CNBC.

Retail trading surged during the coronavirus pandemic, helped by a shift by retail brokerages to commission-free trading, with individual traders now responsible for around 35% of market volume, up from 20% pre-pandemic.

In meme stocks, individual traders contribute as much as 70% of the volume, Cunningham said.

The majority of retail orders bypass exchanges because of an arrangement called payment for order flow, in which retail brokerages sell their customers' marketable orders to wholesale brokers. The wholesalers match the orders internally, trying to profit off of the bid-ask spread, while offering retail traders the best market price or better.

Retail brokers say payment for order flow lowers overall costs for individual traders.

But the practice raises conflict of interest questions and will be included in a broad review of stock market rules, Gary Gensler, chair of the U.S. Securities and Exchange Commission, said last week.

The review will also examine whether off-exchange trading - which is about 50% of the market when institutional block trades are included - distorts the price discovery mechanism for stocks, Gensler said.

'Meme' stock prices may not properly reflect demand - NYSE president
 

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Comments (7)
tim timmus
tim timmus Jun 21, 2021 3:13AM ET
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dark pools are market manipulation period.
Dead Cat Bounce
DeadCatBounce1 Jun 17, 2021 1:03PM ET
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This guy is an ape. 💎✋🚀🌝
david bauer
david bauer Jun 17, 2021 10:02AM ET
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Omg finaly some real writing
Antony Dupont Morissette
Antony Dupont Morissette Jun 17, 2021 9:58AM ET
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So, buy and hold ?
Mr Stanley
MStanley Jun 17, 2021 3:34AM ET
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Gary, do you want to destroy business model created over 30 years? You question dark fibers, dark pools, PFOF, naked shorting.. how HF will beat the market if you fix all this mess?
Ori The Ape
Ori_The_Ape Jun 17, 2021 3:34AM ET
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Guess they'll have to play fair for once... NAH as if that'd ever happen in a banana republic
Wa Ga
Wa Ga Jun 17, 2021 2:20AM ET
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Close dark pool
Joel Schwartz
Joel Schwartz Jun 16, 2021 9:46PM ET
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The problem isn’t meme stocks. It’s the financial system in general which allows, as this article states, “the vast majority of order flow can trade off of exchanges.” Why is that allowed? Dark pool money destroys the transparency and stability of our markets and needs *much* higher regulation.
Nick Smith
Nick Smith Jun 16, 2021 9:46PM ET
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Yep. Agreed. Close the Robinhood a alike! /s
So Os
So Os Jun 16, 2021 9:46PM ET
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Exactly, the Rich get Richer and the poor get strong arm robbed into losing what little they had to begin with. This goes on daily with blatant manipulation and society as a whole is at a loss. Hedge funds get to buy a new mansion in the Hampton's, while others starve.
cc cc
cc cc Jun 16, 2021 9:46PM ET
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it is not the financial system, it is just the SEC rules and some found loopholes. however, retail trader profit as well, they can trade cheaper, while a wholesale broker does not care if price goes up or down, they make the profit with small differences, but high volume. both gain...question is do you want to regulate it and more control.
 
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