US equity markets functioned well during January's GameStop chaos, according to a long-awaited Securities and Exchange Commission (SEC) report, proclaiming authoritatively that short-selling was not the main cause of the exponential rise in the 'meme stock'.
Yep - that's right folks, no short-squeeze at all...
The SEC found in its 44-page omnibus report that, however, that "it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."
GameStop purchases by those covering shorts were “a small fraction of overall buy volume” and the company’s share price remained high even after the direct effects of such trades should have waned, according to the regulator.
Oh and perhaps The SEC should have read this too - how desperate funds used other means to cover their GME shorts.
So having explained who was NOT responsible, the SEC does take aim at Robinhood, and even more specifically payment-for-order-flow (PFOF).
The SEC said online brokerages, enticed to increase revenue through the controversial industry practice of payment for order flow, are turning stock-trading into a game in order to encourage activity from retail investors.
Robinhood came under fire for 'game-ification' of markets and its liquidity situation.
“This episode highlights the integral role clearing plays in risk management for equity trading, but raises questions about the possible effects of acute margin calls on more thinly-capitalized broker-dealers and other means of reducing their risks,” SEC’s report said.
“One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.”
“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,” the report said.
Then the report highlighted market structure issues associated with PFOF:
“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” SEC officials said in the report.
All of which conveniently fits with SEC Chair Gensler's a priori agenda to crackdown on PFOF and show his Congressional peers just how great a regulator he is.
"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.
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Read the full report below: