SEC Says GameStop Stock Surge Due To Individual Investors, Doesn't Recommend Policy Change

Oscar Gonzalez writes via CNET: In January, GameStop's stock price shot through the roof reaching a peak of $483. There were many questions about this sudden surge, especially from the Securities and Exchange Commission, which investigated the rise and fall of the so-called "meme stocks" at the start of the year. The SEC's probe found no wrongdoings when shares of GameStop, AMC and other companies began to skyrocket, according to a 45-page Staff Report on Equity and Options Market Structure Conditions in Early 2021 released (PDF) on Monday. Instead, it found the rise in stock prices was due to individual investors who shared information on social media platforms such as Reddit.

"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," SEC Chair Gary Gensler said in a press release. "Making markets work for everyday investors gets to the heart of the SEC's mission. I would like to thank the staff for bringing their expertise to this important report, and for their ongoing work on to address the issues that January's events raised." There were also questions about the practices of short sellers who bet on GameStop shares to drop in price, as well as Robinhood, the stock trading app that paused the trading of the video game retailers' shares when the market was in a frenzy. However, the SEC didn't recommend any policy changes or take any action against the firms. The agency did point out these issues at the end of the report. It said there should be improved reporting on short sales to allow for better tracking by regulators. The agency also questioned whether "game-like features and celebratory animations" found in investing apps like Robinhood led investors to trade more stock than they would have done otherwise.

tut tut

[Anonymous Coward]

So not even a slap on the wrist?

Re:

[Moryath]

Well duh. Most of the SEC "investigators" were on the inside and made money off pump-and-dumping Gamestop and the other stocks, so of course they're going to say there was no foul...

Quotes from the report. U be the judge

[bubblyceiling]

âoeUntil recently, short interest of more than 90% was observed only a few timesâ"in 2007 and 2008. When examining short interest as a percent of shares outstanding, GME is the only stock that staff observed as having short interest of more than shares outstanding in January 2021.â âoeFigure 6 shows that the run-up in GME stock price coincided with buying by those with short positions. However, it also shows that such buying was a small fraction of overall buy volume, and that GME share prices continued to be high after the direct effects of covering short positions would have waned. The underlying motivation of such buy volume cannot be determined; perhaps it was motivated by the desire to maintain a short squeeze. Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock.â âoeThe increases coincided with a sharp increase in the number of individual accounts actively trading GME. As shown in Figure 4, below, by January 27, the number of unique accounts trading GME on a given day increased from less than 10,000 at the beginning of the month to nearly 900,000.â âoeShorting XRT could have served as an indirect, though imperfect, way of shorting GME. In fact, staff observed a large spike in net redemptions of nearly 6 million shares in XRT on January 27, which may be consistent with short selling activity.âoe âoeThe vast majority of GME stock trades executed off exchange in January 2021 were internalized (approximately 80%) as opposed to executed on ATSs. The market for internalization of GME was highly concentrated, with 88% of internalized dollar volume in January executed by just three wholesalers. Citadel Securities accounted for nearly 50% of internalizer dollar volume during the month, rising to as high as 55% of daily internalized dollar volume twice. Virtu Americas accounted for approximately 26% of the internalized volume during January. While the percentage of GME trading internalized declined during the last week in January, the absolute volumes executed by internalizing firms during the days of the most intense trading in this period were, in some cases, an order of magnitude larger than what had previously been typical for these firms. For example, Citadel internalized an average of just under $37 million of GME per day in December 2020. On January 27, Citadel internalized nearly $4.2 billion of GME. Similarly, Virtu internalized an average of $23.4 million of GME each day in December 2020 and $2.2 billion of GME on January 26. On January 29, Citadel internalized approximately $2.2 billion of GME stock, while Virtu internalized approximately $1.4 billion.â âoeIn the fourth quarter of 2020, GME options traded a median of about 84,000 contracts per day, with a maximum of about 560,000 in one day, with a median dollar volume totaling approximately $10.5 million per day and a maximum of about $120 million in one day. On January 27, 2021, as shown in Figures 10 and 11, below, over 2 million contracts traded, worth over $8 billion.â âoeWhile staff did find GME options trading volume from individual customers increased substantially, from only $58.5 million on January 21 to $563.4 million on January 22 until peaking at $2.4 billion on January 27, this increase in options trading volume was mostly driven by an increase in the buying of put, rather than call, options. Further, data show that market-makers were buying, rather than writing, call options. These observations by themselves are not consistent with a gamma squeeze.âoe

Re:

[phantomfive]

So the price rise was not due to a short squeeze. (That is, a short squeeze happened and some big fund managers got hurt, but that isn't what caused the price to go up significantly).

Re:

[24-bit Voxel]

What it really means is that shorts haven't closed and all the new interest was retail FOMO. So in addition to all the new shares they sold, there is still 140% short interest hidden in all kinds of other vehicles.

So there's what... a billion or two counterfeit shares out there and they haven't closed?

It's official, the free market is a sham.

OK, nothing to see here...

[VeryFluffyBunny]

Now stop asking questions & move along. Some very rich, powerful & thin skinned individuals don't want to suffer any further embarrassment.

Re:

[Aighearach]

"I respect the market"

The hedge fund manager who lost the most money on that deal, when asked about it a few days later.

Re:

[Anonymous Coward]

"I respect the market"

The billionaire hedge fund manager who lost pocket change on a couple of deals, when asked if regulation should try and limit the market and his ability to manipulate the fuck out of it for profit.

FTFY, in case anyone was questioning the stance of a Greedmonger who lost a few battles, but obviously still loves to play and win the war.

Re:

[Aighearach]

You didn't "fix" anything, you added a bunch of blather.

SEC

[polar red]

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," SEC Chair Gary

what a load of bullshit. They want the market only fair when their ultra rich corporate overlords say so.

Re:

[Aighearach]

That's what they said, you just don't understand their words.

They use only English words, but the dialect has slight differences in meaning.

Re: SEC

[Pinky's Brain]

Essentially the SEC says that openly organized short squeezes can not and should not be stopped, this has just made the market a whole lot more dangerous.

There are some very rich people who thrive on that dangers, but I doubt they we're playing 4D chess to arrive at this situation.

Re:

[h33t l4x0r]

Why should they be stopped. Now hedge fund guys will think twice about shorting stocks, how is that a bad thing?

Re:

[geekmux]

Why should they be stopped. Now hedge fund guys will think twice about shorting stocks, how is that a bad thing?

The entire reason the SEC has not and will not crack down on this is most likely because what is good for the goose is good for the gander.

Any regulation imposed here would likely screw with both sides of the same corrupt coin. No way in hell are you going to stop or control hedge fund trading. WAY too many rich powerful people are invested in that activity. You would have better luck getting American mega-corp taxes extracted out of Ireland tax havens.

Re:

[sabbede]

Because it's a necessary market activity? There's nothing wrong with the shorting itself, it's just a way to conserve value across the market.

The problem is when they cheat by trying to force share values to fall. It's all well and good to try and profit from your prediction about where prices are going, and quite another to try and force the outcome. It's the difference between betting on which team will win a sporting event and breaking the kneecap of a star player to guarantee it.

Re:

[burtosis]

It's the difference between betting on which team will win a sporting event and breaking the kneecap of a star player to guarantee it.

Tire iron market is looking quite bullish on this news.

Shorting?

[kackle]

If the entire point of the market is to encourage growth and stability of the economy through investments, why is shorting even allowed*? I'm genuinely curious.

*If there's no corruptible system, there's no corruption.

Re:

[burtosis]

If the entire point of the market is to encourage growth and stability of the economy through investments, why is shorting even allowed*? I'm genuinely curious.

One legitimate reason is to insulate yourself, so you would buy stock but also bet against yourself on a contract shorting the price. That way if it goes up you win, if it makes your contract in the money you win, and the cost is that of the contract option. Naked shorting, the bet without holding the asset isn’t supposed to be legal but it is if it’s indirect enough so you see a “toilet swirler” company, place large bets against it failing and perhaps even use multitudes of accou

Re:

[kackle]

It doesn't seem like it's a worthwhile system, since it can be manipulated so. I'd bet a meme share that the market would be better without it.

Re:

[burtosis]

It doesn't seem like it's a worthwhile system, since it can be manipulated so. I'd bet a meme share that the market would be better without it.

We let these people regulate themselves, but don’t worry, I’m sure after the first trillion they learned their lesson.

Re:

[ToasterMonkey]

If the entire point of the market is to encourage growth and stability of the economy through investments, why is shorting even allowed*? I'm genuinely curious.

*If there's no corruptible system, there's no corruption.

When you define things this simply it's easy to ask why selling isn't restricted. Obviously market values have to go up and down, and you have to allow selling. You can't just say "it's supposed to go up". It wouldn't be a market. If you want a one way money bucket that's hard to take money out of, knock yourself out buddy, just don't look around shocked that everyone else isn't following suit and the returns are low.

What's corrupt about short selling?

Re:

[kackle]

If short selling didn't exist, the market would still go up and down. I'm sure it did before there was shorting. But with shorting, you now allow problems, lots of potential, perpetual problems. People will cheat, perpetually. People will go out of their way to crush companies for money. Government regulators are hired, permanently (and perhaps bribed). Investigative departments are formed, permanently. Court cases are tried. All of this is wasteful. All of this costs you and I money. For what? S

Re:

[Anonymous Coward]

Exactly, markets are about speculating on prices so it would be weird to be limited to only one opinion and direction. The price is the consensus at a particular time and in a particular environment. However, it's almost always much easier to bet that the market will go up (even more so as timeframes become longer).

Re:

[mikhail scott]

Because it's a necessary market activity? There's nothing wrong with the shorting itself, it's just a way to conserve value across the market.

This is an argument for not banning shorting. It is not an argument for banning people from attacking bad actors using the tools of the marketplace.

The problem is when they cheat by trying to force share values to fall. It's all well and good to try and profit from your prediction about where prices are going, and quite another to try and force the outcome. It's the difference between betting on which team will win a sporting event and breaking the kneecap of a star player to guarantee it.

And these were exactly the targets of the Gamestop/AMC actions. Individual investors teamed up to attack bad actors that were acting in bad faith. I see nothing wrong with this and, amazingly, neither does the SEC. It may be the first time we agree on something.

Re:SEC

[thegarbz]

You realise that the SEC was investigating on behalf of the ultra rich corporate overlords who in many cases lost a fuckton of money right?

I get it you're desperate to share your narrative that the entire world is out to get you but your post is completely non sequitur compared to what SEC's conclusion was. The corporate overlords specifically were the ones who wanted the SEC to stop meme stock trading somehow, and they just said no.

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[h33t l4x0r]

No, they were investigating whether big players were behind it, and the answer was: they weren't. Some hedge funds lost money and they will be smarter next time. Consider the problem solved.

Re:

[DrMrLordX]

That investigation was an obvious pretense to punish anyone outside of Wall Street that would dare to trifle with Wall Street's naked shorting scams. It is refreshing to see that the SEC didn't do the bidding of Wall Street. This time.

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[burtosis]

It is refreshing to see that the SEC didn't do the bidding of Wall Street. This time.

Billionaire hedge fund managers:

But it’s blatant market manipulation! Retail investors can’t just buy the same stock and hold it, it’s a crime!! I mean, they all say “they just like the stock”, what more proof do you need!!! Arrest them!!1!1!11!

Re:

[burtosis]

The amount of YT channels pumping GME (some of which were created for this sole purpose), doesn't make this scenario hard to believe. The same thing happened on all the social media sites. I don't have a problem with people communicating about this but there was a certain hivemind scenario, much like in politics. Videos suggesting caution often got downvoted.

And yet there was no dump to the pump. GME is still trading 170-200 most days since it all blew up.

Re:

[ToasterMonkey]

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," SEC Chair Gary

what a load of bullshit. They want the market only fair when their ultra rich corporate overlords say so.

... how have the equity markets been unfair to you?
Please explain your investing strategy for the last ten years, your performance, and explain how that is unfair.

Pick a boring index fund, any of them, I'll use VTI. You pull up the last ten years of performance and put your fucking finger down where the market was unfair to you.

I'm mean I'm not saying you didn't have a bad experience with the stock market, you very well may have. But if a fucking index fund like VTI beat your ass, you and your dumbass in

Collusion and market manipulation is A-OK now!

[140Mandak262Jamuna]

The problem is not gamification or celebratory encouragement. Its not even delayed and bad reporting of balances before the clearance periods that made one teenager commit suicide thinking he had run up several million dollars loss, and his parents will be protected from the loss if he died. No, its not even that.

The key is prevention of collusion, insider information exchange, quid-pro-quo underground exchange of non public information. Right now we think it is gangs of individual investors all betting against professional wall street traders. Its possible it is really big players using many anonymous smaller accounts using bots, starting a run and front running the herd. Its even possible they use sophisticated algorithm to find quirks or bugs in pricing very long duration options, deep out of money calls/puts and take up a position and then start this herd.

If social media and anonymous accounts exchanging trading information is ok, it allows the insiders, market manipulators, pump and dump artists, short and distort gangs to run wild.

More transparent disclosure and accounting of short position is desperately needed. The high frequency traders take advantage of nano second differences between markets. Short positions are disclosed once in 15 days. Not 15 seconds, or 15 hours, 15 days!!!

Every trade is marked whether it is short sale, or regular sale. Companies like S3 partners track it and report to their clients daily estimate of short positions. But vast parts of the private sales are not reported and it is only an estimate. Given the advances in tech and computers, it is time we update short positions continuously. May be make it Level 2 quotes or something, make it proprietary , make it a little expensive to get. But pay people to keep track of short positions continuously, and do not allow private sales and dark web to mess up the information flow.

Sunlight is the best disinfectant.

Re:

[Tony Isaac]

It always has been A-OK, you just have to collude and manipulate in a regulatory-compliant way.

Incompetent

[uncoveror]

There is no federal agency worse at what they are supposed to be doing than the SEC. The Wall Street Casino will never be regulated in any meaningful way.

Re:

[MooseTick]

"The Wall Street Casino will never be regulated in any meaningful way."

Wait til there's a big crash that tanks half of the US's 401k, and then you'll see some change. Currently ~60M people have ~$7T parked in 401ks, and that's mostly invested in stocks.

This whole thing was amazing.

[Petersko]

Take a whole group of people convinced their on the "inside" of something rebellious, have them put THEIR real money on YOUR crusade, and run that train as far as it goes. I'm appalled at the lack of critical thought those poor folks applied. As some version of the old adage goes, "There are no friends in the stock market." Whomever is telling you, "Hold the line!" and "If you take profits now, they win!" is very certainly your enemy.

This "us versus them", "David versus Goliath" is so destructive that it's

Diamond Hands!

[Chas]

"Think about the poor investors!"

These people are (supposed to be) adults.

This is a definite win for the individual investor over the organizations who were illegally naked-shorting their positions.