NEW YORK, Oct. 1 (Reuters) – The US Securities and Exchange Commission plans to release its long-awaited report on the GameStop trading saga shortly. Continue reading
The SEC report is expected to address issues surrounding the market chaos in late January when a spate of trading through commission-free retail brokers drove GameStop Corp (GME.N) and other popular “meme stocks” to extreme highs and the hedge squeezed funds that had bet against them. Continue reading
Amid the intense volatility, several brokers restricted trading in the affected stocks, slowing the rally, disgruntled retailers and shaking market confidence.
Here are some issues the SEC claims to be reviewing:
GAMIFICATION OF TRADE
SEC Chairman Gary Gensler said “gamification of the trade” by commission-free retail brokers is a growing problem as it could encourage more trade than is in the best interests of investors.
Gensler highlighted that retail brokers are using artificial intelligence, predictive data analysis, and machine learning to offer their customers tailored products and drive sales.
In March, the broker Robinhood Markets (HOOD.O) refrained from using confetti animations in its trading app, which, among other things, had marked the users’ first trades, following criticism from politicians and supervisory authorities. Continue reading
PAY FOR ORDER FLOW
Gensler criticizes Payment for Order Flow (PFOF), the practice of retail brokers like Robinhood or Charles Schwab Corp (SCHW.N), which in return send most of their customers’ orders to wholesale market makers instead of payments.
Gensler has said that PFOF creates potential conflicts and questioned whether brokers have incentives to encourage their clients to trade more often in order to maximize payments.
PFOF proponents say this is a major reason most brokers have been able to stop charging trading commissions, which has helped fuel the retail trade boom. Most of Robinhood’s revenue comes from PFOF. Continue reading
PFOF defenders say this benefits retailers as wholesale brokers do their business at the best market prices or better.
However, Gensler said the best prices displayed on the exchanges may not accurately reflect market sentiment because so many trades are now being executed outside of the exchanges where stock prices are formed, resulting in larger bid-ask spreads to the detriment of all investors.
The GameStop saga highlighted the small number of market makers who dominate the retail market, with Citadel Securities all around 37% of total US listed retail volume. That could pose competition problems, said Gensler.
Almost half of all trades are done outside of exchanges. This is in part due to rules that allow market makers to offer a price improvement in the sub-penny range of bids and offers, while exchanges have to quote in pennies, which, according to Gensler, has created an uneven playing field.
The “sub-penny rule”, which limits exchanges to penny quotes, was enacted in 2005 because of concerns that if small price increases were allowed, experienced traders could use them to get ahead of retail orders.
CLEARINGHOUSES AND BILLING HOURS
The massive volatility of âMemeâ stocks in January caused the post-trade clearinghouse, which guarantees trades, to demand billions in additional collateral from retail platforms.
In response, several brokers restricted trading in the affected stocks, sparking speculation on Reddit’s WallStreetBets forum that the brokers would protect hedge funds that would lose if stocks rose.
Vlad Tenev, CEO of Robinhood, has argued that the problem is mainly due to the two day time it takes to settle a trade and if the settlement was in real time, collateral would not have been an issue. Continue reading
Gensler stated he advocates shortening the settlement cycle.
SHORT SALES INFORMATION
Most of the stocks in the GameStop saga have been sold heavily short – a strategy used to bet that the stock price will fall – with more than 140% short of GameStop, meaning more stocks have been sold short than were available for trade. Continue reading
That is possible on paper because if stocks are borrowed short and then sold back to the market, the new owner of the stocks has no idea he is on the other side of a short sale and can loan them out like the previous owner did .
Gensler said he was considering more disclosure of short selling and stock lending.
Reporting by John McCrank, editing by Nick Zieminski
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