Gamestop Mania Severely Tested Market System, Regulator Says

By Associated Press
October 18, 2021

 The U.S. banal marketplace surely shook erstwhile hundreds of thousands of regular radical abruptly piled into GameStop aboriginal this year, driving its terms to heights that shocked nonrecreational investors. But it didn't break.

That's 1 of the takeaways from a report by the Securities and Exchange Commission's staff released Monday astir January's “meme-stock” mania. As GameStop's banal changeable from $39 to $347 successful conscionable a week, immoderate of the banal market's plumbing began creaking, but the study indicated the market's basal systems and operations remained sound. 

The surge for GameStop and different downtrodden stocks besides laid bare however overmuch powerfulness is being wielded by a caller procreation of smaller-pocketed and novice investors, equipped with apps connected their phones that marque trading fun. 

"The utmost volatility successful meme stocks successful January 2021 tested the capableness and resiliency of our securities markets successful a mode that fewer could person anticipated," the study said. "At the aforesaid time, the trading successful meme stocks during this clip highlighted an important diagnostic of United States securities markets successful the 21st century: wide participation."

Many of the points successful the study were already known, specified arsenic however the highly dense bets made by immoderate hedge funds against GameStop's banal really helped accelerate its utmost ascent, though they weren't the main driver. 

The study besides didn't marque immoderate recommendations for changes to however the marketplace is structured, but it pointed to respective areas for further consideration. They see topics that SEC Chair Gary Gensler has already cited successful caller speeches, specified arsenic whether the mode immoderate brokerages marque their wealth encourages them to propulsion customers to commercialized much often than they should. 

The study besides indicated the SEC could further scrutinize events that whitethorn origin a brokerage to restrict trading successful a stock. During the tallness of the frenzy, respective brokerages barred customers from buying GameStop aft the clearinghouse that settles their trades demanded much currency to screen the accrued hazard created by its highly volatile price. That near galore investors incensed. 

The study besides raised questions astir whether investors are getting the champion execution connected their trades erstwhile truthful galore are getting routed to large trading firms alternatively of to exchanges similar the Nasdaq oregon the New York Stock Exchange. 

And, possibly successful a disappointment to immoderate of the investors who piled into GameStop to punish the fiscal elite: The SEC's unit said it doesn't judge hedge funds were broadly affected by investments successful GameStop and different meme stocks. 

During the run-up of GameStop's price, galore radical were bellowing connected Reddit and different societal media platforms that this was their accidental to instrumentality it to the hedge funds. They took purpose astatine funds that had stake GameStop, a struggling video-game retailer, would spot its terms proceed to fall.

Those hedge funds did that by “shorting” the stock. In specified a trade, a abbreviated seller borrows a share, sells it and past hopes to bargain it backmost aboriginal astatine a little terms to pouch the difference. 

Some of those abbreviated sellers were so burned. And erstwhile they bought GameStop shares to get retired of their abruptly soured bets, the buying helped propulsion the banal up adjacent further. But different hedge funds that had earlier stake connected gains for GameStop's banal made profits, arsenic did others who jumped into the upsurge. 

Hedge funds arsenic a radical person been making wealth this year, including a 1.2% instrumentality successful January during the throes of the meme mania, according to the HFRI Fund Weighted Composite index.

The SEC's unit nevertheless said that improved reporting of abbreviated income is different country worthy of further study, peculiarly if it volition assistance regulators amended way the market.

Additional reporting from The Associated Press.