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U.S. SEC praises equity market structure, absolves short sellers in GameStop report

Stock MarketsOct 18, 2021 04:35PM ET
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© Reuters. FILE PHOTO: U.S. one dollar banknotes are seen in front of displayed GameStop logo in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration/File Photo/File Photo

By Katanga Johnson and Chris Prentice

WASHINGTON (Reuters) - The U.S. markets functioned well during January's GameStop (NYSE:GME) volatility, while short selling was not the main cause of the unprecedented rise in the 'meme stock,' according to a long-awaited Securities and Exchange Commission (SEC) report.

The report published on Monday provides a post-mortem into how amateur traders using commission-free retail brokerages drove shares in GameStop and other popular meme stocks to extreme highs, squeezing hedge funds that had bet against them.

Amid the intense volatility, several brokerages restricted trading in the affected stocks, curbing the rally, infuriating retail traders, sparking outrage from policymakers, and leading to a Congressional hearing.

Despite the extraordinary series of events, the SEC concluded that the basic plumbing of the market remained "sound," an SEC official said. The report also found that positive sentiment on video game retail company GameStop rather than dislocations caused by short selling was the main driver of GameStop's stock spike.

Short sellers borrow shares from brokers and then sell them into the market, with the agreement that they will buy the shares back and return them to the lender at a later date. If the price has fallen, the short seller can buy the shares back at a lower price than they paid for them, locking in a profit.

When a heavily shorted stock soars, short sellers are forced to buy the shares back at higher prices to close out their positions, pushing the stock even higher - known as a "short squeeze."

The SEC found, however, that "it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."

It also rebutted a popular theory, sparked by the unusually high volume of short selling in GameStop, that some hedge funds were 'naked' shorting the stock - selling without arranging to borrow the shares. The SEC said it found no evidence of this.

The report does not address several outstanding questions, including whether bad actors manipulated social media to whip up positive sentiment in GameStop, or whether hedge funds tried to pressure retail brokers to restrict trading in GameStop, something that all parties concerned have denied.

An SEC official said it could not discuss in the report misconduct that could result in a potential enforcement action.

The agency's chair Gary Gensler told Congress earlier this year that the agency would address other issues raised by the saga, including short selling disclosures, game-like trading prompts used by brokers, and brokers' practice of sending customer orders to wholesale market makers for a fee.

"January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible," Gensler said in a Monday statement.

U.S. SEC praises equity market structure, absolves short sellers in GameStop report
 

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Comments (6)
GFlen BC
GFlen BC Oct 19, 2021 2:12AM ET
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Now we can see who SEC works for
Pilot TwoFive
Pilot TwoFive Oct 18, 2021 6:59PM ET
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Why are govt officials the stupidest people on the planet?
Dron Forbes
Dron Forbes Oct 18, 2021 6:50PM ET
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I would prefer a million short selling hedge funds in the market than a group like reddit who dont know the consequence of their actions. Too many people lost money to this. You would prefer to see retail traders who dont know any better lose so you can prove you can get enough people together to move a stock? Thats selfish and irresponsible.
Davide Leone
Davide Leone Oct 18, 2021 6:50PM ET
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Apes, together, strong!
Jokers R Us
Jokers R Us Oct 18, 2021 6:50PM ET
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Bankers run the government, once you understand our monetary system you’ll get why everything happends in the world.
my name
my name Oct 18, 2021 5:57PM ET
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yes, it was classic pump and pump scheme. GME will fall back to $50 in a year or two...
Mad Money
Mad Money Oct 18, 2021 4:51PM ET
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Crooks
 
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