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According to a long-awaited report by the US Securities and Exchange Commission (SEC), the US market performed well during the GameStop volatility in January, and short selling was not the main reason for the unprecedented rise in “memetic stocks.”
The report released on Monday provided a post-mortem analysis of how amateur traders used commission-free retail brokers to push the share prices of GameStop and other popular meme stocks to extremely high levels, squeezing the hedge funds that bet on them.
In the violent volatility, several brokerages restricted the trading of affected stocks, curbed gains, angered retail traders, aroused the anger of policy makers, and led to congressional hearings.
A U.S. Securities and Exchange Commission official said that despite a series of extraordinary events, the committee concluded that the basic channels of the market are still “sound”.
Large-scale short-term
A key narrative of the GameStop incident is that a group of retail investors caused a huge short squeeze by pushing up the stocks they were betting on hedge funds. They did so by issuing a large number of purchase orders to the market, forcing hedge funds to also have to buy stocks to make up for short positions, thereby pushing GameStop higher.
Short sellers borrow stock from a broker, sell it to the market, and agree that they will buy back the stock and return it to the lender in the future. If the price falls, short sellers can buy back the stock at a price lower than they paid, thus locking in profits.
When severely shorted stocks soar, short sellers are forced to buy back the stock at a higher price to liquidate the position, thereby pushing the stock higher-known as a “short squeeze.”
However, the US Securities and Exchange Commission stated that this story was not fully supported by evidence. According to regulators, the purchases of GameStop by those short-covered positions “only accounted for a small portion of the total purchases,” and the company’s stock price remained high even after the direct impact of such transactions should have diminished.
Social media manipulation and pressure
The report did not address several unresolved issues, including whether bad actors manipulated social media to stir up positive sentiment on GameStop, or whether hedge funds tried to pressure retail brokers to restrict GameStop transactions, which all involved parties denied at this point.
Perhaps the biggest victim of bullish investors joining Reddit and other social media platforms to push GameStop higher is Gabe Plotkin’s Melvin Capital. The hedge fund took a lot of short positions on GameStop, and its January loss resulted in the company receiving $2 billion in cash from Ken Griffin’s Citadel and approximately 7.5 from Steve Cohen’s Point72 Capital Management. One hundred million U.S. dollars. Despite this, the US Securities and Exchange Commission stated that most hedge funds emerged from the situation unscathed.
The regulator stated in its report: “The staff believes that hedge funds as a whole have not been significantly affected by investments in GME and other meme stocks.” “The staff did not find any private equity funds and registered fund advisors experiencing liquidity. Sexual issues or difficulties with counterparties.”
Then there is a hotly debated topic about whether hedge funds prompted Robinhood to restrict customers from increasing their GameStop positions during the stock surge in late January.
Robinhood has repeatedly argued that because its clearing house required it to provide more funds to deal with higher risks, it stopped buying orders. When Robinhood CEO Vlad Tenev faced a series of questions from lawmakers at the House of Representatives hearing in February, this issue became the primary focus of attention.
The SEC did point out in its report that the clearing house requires member companies to provide billions of dollars in additional margin, and that brokers temporarily prohibit customers from buying additional stock.
Gary Gensler, the chairman of the agency, told Congress earlier this year that the agency will address other issues arising from the incident, including short-sale disclosures, trading tips for similar games used by brokers, and brokers sending customer orders to wholesale market makers. way of doing. cost.
“The events of January gave us an opportunity to consider how to make further efforts to make the stock market as fair, orderly and efficient as possible,” Gensler said in a statement issued on Monday.
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