According to the long-awaited Securities and Exchange Commission (SEC) report, US markets performed well during the January gamestop volatility, although short sales were not the main reason for the unprecedented rise in “meme stock”.
The report, released Monday, provides a postmortem on how amateur traders use commission-free retail brokers to take shares of Gamestop and other popular meme stocks to extreme heights, squeezing betting hedge funds against them.
In the midst of intense instability, a number of brokers restricted trade to damaged stocks, controlled rallies, angered retailers, angered policymakers, and led to congressional hearings.
Despite the remarkable consistency of events, the Commission concludes that the basic plumbing of the market remains “smooth”.
Extensive short pressing
A key detail of the Gamestop incident is that a force of retailers creates a huge short-term pressure by running stocks that are betting against hedge funds. They flooded the market with buy orders, forcing hedge funds to buy stocks to cover their shorts, pushing gamestops higher.
Short-sellers borrow shares from brokers and then sell them in the market, with the agreement that they will buy the shares and return them to the payer at a later date. If the price goes down, the short seller can buy the shares at a lower price than what is paid for them, locking in the profits.
When a heavy short stock rises, short sellers are forced to buy shares at higher prices to close their positions, putting more pressure on the stock-in what is known as a “short squeeze”.
Yet the SEC said the story was not entirely supported by evidence. The shorts covering Gamestop were “a small fraction of the total purchase amount” and, according to the regulator, the company’s share price remained high even after the direct impact of such a trade was reduced.
Social media manipulation and pressure
The report does not address a number of outstanding questions, including whether bad actors have used social media to evoke positive feelings in Gamestop, or whether hedge funds have tried to pressure retail brokers to restrict trading in Gamestop, which all parties have denied.
Gabe Plotkin’s Melvin Capital was probably the biggest victim of bullish investors coming together on Reddit and other social media platforms to elevate the gamestop. Hedge funds had a big short on Gamestop and its January losses resulted in the firm receiving a ইন 2 billion to $ 2 billion cash infusion from Ken Griffin’s Citadel and Steve Cohen’s 72 750 million from Point 72 Capital Management. Nevertheless, the SEC said hedge funds mostly emerged from intact.
“Employees believe that hedge funds have not been significantly affected by investing heavily in GMEs and other meme stocks,” the regulator said in its report. “Employees did not notice that any advisers to personal funds and registered funds experienced liquidity problems or difficulties with opponents.”
Whether or not the hedge fund then pressured Robinhood to add Robinhood to their gamestop position at the end of January was hotly debated as stocks were rising.
Robinhood has repeatedly argued that it has closed purchase orders because of its clearinghouse claim that it has posted more capital to address higher risks. The issue came to the fore when Robinhood chief executive Vlad Tenev faced questions from lawmakers during a February House of Representatives hearing.
The SEC noted in its report that the clearing house demanded billions of dollars in additional margins from member firms and that brokers temporarily prevented clients from purchasing additional shares.
Agency chairman Gary Gensler told Congress earlier this year that the agency would address other issues raised by the story, including short sales disclosures, trading prompts such as games used by brokers, and the practice fee of brokers sending customer orders to wholesale market makers.
“The events of January have given us an opportunity to consider how we can further our efforts to make equity markets as fair, orderly and efficient as possible,” Gensler said in a statement Monday.