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The Securities and Exchange Commission released a 45-page report on Monday offering no specific policy recommendations following the early 2021 frenzy over GameStop (GME) stock.
However, the report leaves the door open to “additional consideration” on matters like the "digital engagement practices" that brokerages may be using to glorify risky stock trading.
Robinhood (HOOD), for example, drew scrutiny for using digital confetti to celebrate trades, a practice it abandoned as some criticize brokerages for actively encouraging gambling.
The report says these practices may be incentivized by the industry model of payment for order flow, where brokerages route orders through wholesale market-makers. SEC Chair Gary Gensler has not ruled out the possibility of a full ban on the model.
[Read: How do brokerage firms make money]
Responding to the SEC report, Robinhood said there is "no evidence" that either payment for order flow or gamification were to blame for the events of Jan. 28.
"We look forward to continuing to engage with the SEC to ensure the markets remain accessible and affordable for all," a Robinhood spokesperson added.
The SEC also suggested improved disclosures on short positions to better monitor unusual price dynamics, as well as shorter settlement cycles that could reduce the likelihood of brokers having to impose controversial trading restrictions.
SEC staff emphasized the agency’s job is to ensure fair, orderly, and efficient markets — not to stamp out price volatility.
“People may disagree about the prospects of GameStop and the other meme stocks, but those disagreements are what should lead to price discovery rather than disruptions,” the report reads.
Senior SEC staff said the report was not designed to make specific policy actions, making it unclear if there are immediate implications for the SEC’s approach to the brokerages, hedge funds, clearinghouses, or wholesale market makers that were engulfed in the episode.
Flashback to January 2021
Most of the staff report recaps the WallStreetBets-fueled surge in GameStop stock in January 2021. Short sellers were forced to cover their positions as more investors piled into the meme. In a matter of days, shares of GameStop, a long-struggling video game retailer, had exploded over 2,000%.
[Read: What is short selling?]
A lot of controversy lies in what happened after the initial pop.
Some brokers started imposing restrictions on the ability to buy — but not sell — meme stocks. The likes of Barstool’s Dave Portnoy started sparking theories about hedge funds and wholesalers pressuring the brokerages to stop the run-up in meme stocks.