Game? Stopped? Revisited
Updated: Nov 11, 2021
The Securities and Exchange Commission has released it's report on the trading around Game Stop. This post is in followup to the original post of February 18, 2021.
Going to the conclusions of the staff report here is what they found:
Conclusions The extreme volatility in meme stocks in January 2021 tested the capacity and resiliency of our securities markets in a way that few could have anticipated. At the same time, the trading in meme stocks during this time highlighted an important feature of United States securities markets in the 21st century: broad participation. There are many different types of investors, and they buy and sell stocks for many different reasons. However, when share prices change rapidly and brokerage firms suddenly suspend trading, investors may lose money. Underneath the memes are actual companies, with employees, customers, and plans to invest in the future. Those who bought GameStop became co-owners of a company through a system of mutual trust and participation that sustains our economy. People may disagree about the prospects of GameStop and the other meme stocks, but those disagreements are what should lead to price discovery rather than disruptions. These events present an opportunity to reflect on the market structure and regulatory framework and identify additional areas for potential study and further consideration in the interests of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. These areas include:
1. Forces that may cause a brokerage to restrict trading. A number of clearing brokers experienced intraday margin calls from a clearinghouse. In reaction, some broker-dealers decided to restrict trading in a limited number of individual stocks in a way that some investors may not have anticipated. 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. One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.
2. Digital engagement practices and payment for order flow. 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. In addition, 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.
3. Trading in dark pools and through wholesalers. Much of the retail order flow in GME was purchased by wholesalers and executed off exchange. Such trading interest is less visible to the wider market—and payments to broker-dealers may raise questions about the execution quality investors receive. Further, though wholesalers increasingly handle individual investor order flow, they face fewer requirements concerning their operational transparency and resiliency as compared to exchanges or ATSs.
4. Short selling and market dynamics. While short selling and calls on social media for short squeezes received a great deal of media attention, the interplay between shorting and price dynamics is more complex than these narratives would suggest. Improved reporting of short sales would allow regulators to better track these dynamics.
For those of you who would like the full report it can be found here:
Many of you will remember the post of February 1, 2021
Stephen Akin looks at Bloombergs Matt Levin's story.
Game? Stopped? ??? ??????
Remember GameStop? GameStop Corp. common stock started the year at $18.84; at the end of January it briefly traded as high as $483 because people on Reddit’s r/WallStreetBets forum bought a lot of it.
There were call options and gamma squeezes and short squeezes; brokerages restricted trading in the stock as it got so volatile that it blew up their clearinghouse margin; we all had a good time. Then it ended. GameStop closed yesterday at $45.94. Oh well. Never mind.
The whole thing was interesting and often very funny, but I do not think it was very important. Sometimes stocks trade at the wrong price for a while; sometimes there are bubbles and pumps and short squeezes; sometimes everybody sees the bubble happening in real time but no one can stop it. When this happens, people lose money, and people lost money on GameStop. But the people who lost money on GameStop seem to have been mostly (1) sophisticated hedge fund professionals who made reasoned risky bets that did not work out and (2) people who made self-consciously risky dumb gambles after reading r/WallStreetBets and pretty much got the gamble they paid for.
Seems fine? The stock market cannot only be a casino; it has to serve the purposes of price discovery and capital formation and all that good stuff. But in order to serve those purposes it has to also be a casino, and it seems to me that the casino worked fairly well for GameStop. GameStop was the hot craps table with the excited crowd gathered around it. Everyone understood intellectually that the odds were against them and eventually the hot streak had to end, but look how happy everyone was! Look at the hugs and high-fives! Drink the free drinks! Isn’t this great? Don’t you want to gamble here too? Who cares if you lose some money?
I guess this is all kind of a minority position. Today the House Financial Services Committee is holding a virtual hearing with the grim title “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide,” and I do not think anyone will be having much fun.Congressional hearings on Robinhood and Reddit make this an excellent time to bring this issue to light.
Congressional hearings on Robinhood and Reddit make this an excellent time to bring this issue to light. I am quite concerned about the gamma acceleration that is occurring in stock and options markets regarding GME Game Stop and other public traded issues.
If you listen to the scuttlebutt it’s all about retail traders, Robinhood and other novice market traders gambling with the latest stimulus check.
It’s quite serious, even with trade commissions at zero there are underlying risks that remain in markets. If retail investors don't understand how financial markets work they are playing with
their financial future.
Many of you know I've been writing on this topic for years.
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