This is one of the key takeaways from the Securities and Exchange Commission’s Monday report on January’s meme-stock mania. GameStop stock rose from $39 to $247 in a matter of weeks, but some of its plumbing started creaking. However, the report stated that the basic systems and operations of the market remained sound.
GameStop’s surge and other downtrodden stock prices also revealed how much power is being held by a new generation, smaller-pocketed investors and novice traders, equipped with apps that make trading fun.
The report stated that January 2021’s extreme volatility in meme stocks tested the resilience and capacity of the securities markets in a way few could have predicted. “At the exact same time, trading in meme stocks in January 2021 highlighted an important feature in United States securities markets of the 21st Century: broad participation.”
Many of the points made in the report were already known. For example, the fact that some hedge funds placed heavy bets against GameStop stock helped to accelerate its rapid ascent. However, they weren’t the primary driver.
Although the report didn’t recommend any changes in market structure, it did suggest several areas that should be considered. These topics include those that Gary Gensler, SEC Chair, has already mentioned in speeches. For example: Does the way brokerages make money encourage them to push customers into trading more than they should?
According to the report, the SEC could also monitor events that might cause brokerages to limit trading in stocks. Many brokerages stopped customers from purchasing GameStop during the frenzy. The clearinghouse that settles trades required more cash to cover the higher risk associated with GameStop’s volatile price. Many investors were furious.
It was also pointed out that investors may not be getting the best execution when their trades are routed to large trading firms rather than to stock exchanges such as the Nasdaq and the New York Stock Exchange.
Perhaps in disappointment for some of the investors who bought into GameStop to punish them financially elite, the SEC staff stated that it does not believe hedge funds were directly affected by GameStop investments. They targeted funds that bet GameStop’s price would continue to fall, which was a poor video-game retailer.
Hedge funds “shorted” the stock to do this. A short seller takes out a share and sells it. Then, the short seller hopes to purchase it back at a lower price in order to keep the difference.
Some short sellers were actually burned. The buying of GameStop shares helped propel the stock higher when they purchased them to exit their suddenly lost bets. Other hedge funds, which had previously bet on GameStop stock gains, made profits as well as others who joined the upsurge.
According to the HFRI Fund Weighted Composite Index, hedge funds have made money as a whole this year.
However, the staff of SEC stated that improving reporting on short sales is an area worth further investigation, especially if it will allow regulators to better track the market.
