What to watch out for in the US SEC’s GameStop report

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NEW YORK – The United States Securities and Exchange Commission plans to release its long-awaited report on the GameStop trade saga soon and this could have implications for brokerage firms, wholesale market makers, stock exchanges and investors. detail.

SEC report expected to address issues related to market chaos in late January, when an influx of trades through commission-free retail brokers drove shares of GameStop Corp and other popular “memes” to extreme highs , crushing the hedge funds that had bet against them.

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Amid the intense volatility, several brokerage firms restricted trading in the affected stocks, slowing the recovery, infuriating retail traders and shaking market confidence.

Here are a few topics the SEC said it was scrutinizing:

THE GAMIFICATION OF TRADING

SEC Chairman Gary Gensler has said that the “gamification of trading” by commission-free retail brokerage firms is a growing concern because it may encourage more trades than in the interests of investors.

Gensler highlighted retail brokers’ use of artificial intelligence, predictive data analytics, and machine learning to deliver personalized products to their clients and increase revenue.

In March, brokerage Robinhood Markets discontinued the use of confetti animation on its trading app that had marked users’ first trades, among other changes, following criticism from politicians and regulators.

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PAYMENT FOR ORDER FLOW

Gensler criticized Payment of Order Flow (PFOF), the practice of retail brokers, like Robinhood or Charles Schwab Corp, who send most of their clients’ orders to wholesale market makers rather than exchanges, in return. of payments.

Gensler said PFOF raises potential conflicts and asked https://www.sec.gov/news/speech/gensler-global-exchange-fintech-2021-06-09 if brokers are encouraged to encourage their clients to trade more frequently to maximize payments.

PFOF supporters say this is one of the main reasons most brokerages have been able to stop charging trading commissions, which has helped fuel the retail boom. The majority of Robinhood’s income comes from PFOF.

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PFOF advocates say it benefits retail traders, as wholesale brokers execute their trades at the best prices found on the exchanges or better.

But Gensler said that since so many trades are now executed outside of the exchanges, where stock prices are formed, the best prices displayed on the exchanges may not accurately reflect market sentiment, resulting in Wider bid-ask spreads to the detriment of all investors.

CONCENTRATION OF MARKET MAKERS

The GameStop saga has highlighted the small number of market makers who dominate the retail market, with Citadel Securities executing around 37% of all US listed retail volume https://www.citadelsecurities.com/products / equities-and-options. This could pose competition concerns, Gensler said.

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EXCHANGE PRICE

Almost half of all transactions are executed off the exchanges. This is in part due to rules that allow market makers to offer fractional price improvement under a dime on bids and offers, while the exchanges must quote in pennies, which Gensler says has created ground of uneven play.

The “sub-penny rule” which limits trading to penny quotes was enacted in 2005 out of concern that if smaller price increases were allowed, sophisticated traders could use them to get a head start on orders of pennies. detail.

CLEARING CENTERS AND PAYMENT TIMES

The massive volatility of “meme” stocks in January prompted the post-trade clearinghouse that guarantees trades to demand billions of dollars in additional collateral from retail trading platforms.

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In response, several brokers restricted trading in the affected stocks, sparking speculation on Reddit’s WallStreetBets forum that brokers were protecting hedge funds that stood to lose if stocks rose.

Robinhood CEO Vlad Tenev argued that the problem was largely due to the two-day delay it took to settle a transaction, and if settlements were in real time, guarantees wouldn’t have been an issue.

Gensler has indicated https://www.sec.gov/news/speech/gensler-global-exchange-fintech-2021-06-09 that he is in favor of shortening the settlement cycle.

SHORT SALE DISCLOSURES

Most of the stock in the GameStop saga has been heavily shorted – a strategy used to bet that a stock price will go down – with over 140% short interest in GameStop, implying that more stocks have been shorted than available for negotiation.

This is possible on paper because when stocks are borrowed short and then resold in the market, the new owner of the shares has no idea that they are on the other side of a short sale and can lend them out. , just like the previous owner did.

Gensler said he was considering more disclosure regarding short sales and securities lending. (Reporting by John McCrank, editing by Nick Zieminski)

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