The Securities and Trade Fee is weighing new rules on stock-trading apps after a frenzy in GameStop and different “meme stocks” earlier this 12 months, based on a report issued by the fee Monday.
The company discovered that the trading mania, during which a whole lot of 1000’s of buyers piled into the shares of struggling firms, severely examined the market system however did not break it. Though the report stopped brief of making suggestions, it outlined a number of areas for additional research.
“The extreme volatility in meme stocks in January 2021 tested the capacity and resiliency of our securities markets in a way that few could have anticipated,” securities regulators stated. “At the same time, the trading in meme stocks during this time highlighted an important feature of United States securities markets in the 21st century: broad participation.”
GameStop shares noticed a large worth surge in January, rising from $39 to $347 in a single week as retail buyers poured into the markets. Many merchants have been spurred by apps like Robinhood, which permit customers to commerce stock totally free. Because the trading devolved right into a standoff between extraordinary buyers who have been bidding up costs of the corporate and hedge funds that have been short-selling GameStop, betting the worth would fall, some brokerages halted trading in GameStop and dozens of different standard public firms, prompting shopper outrage, a quantity of lawsuits and a congressional listening to.
The report indicated the SEC might additional scrutinize occasions that will trigger a brokerage to limit trading in a stock.
Commerce apps within the crosshairs
Robinhood, which counts 13 million customers, promised to “democratize” stock trading however has been criticized for manipulating would-be merchants by gamifying elements of shopping for and promoting shares in ways in which enchantment to younger buyers.
The brokerage has additionally taken warmth for promoting customers’ order data to bigger trading companies that execute these transactions. (Many different brokerages additionally interact within the apply, is aware of as “payment for order flow.”) Greater than 80% of Robinhood’s income final 12 months got here from funds for order movement and rebates for cryptocurrency trades, the corporate revealed when it went public.
Monday’s report means that greater regulation of stock-trading apps is coming, constructing on months of statements from SEC commissioners.
“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” the report states.
Incentive to commerce
It additionally takes a shot on the apply of apps like Robinhood promoting trading data to bigger companies, suggesting that the apply might have incentivized some brokerages to push prospects to commerce extra typically than they need to.
“[P]ayment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” the report famous.
SEC Chair Gary Gensler has been essential of the apply of cost for order movement, telling Barron’s in August that he favored an outright ban. In September, Gensler informed the Senate banking committee that he wished to crack down on the apply.
He questioned whether or not buyers are getting the very best execution on their trades when so many of these trades are getting routed to huge trading companies as a substitute of to exchanges just like the Nasdaq or the New York Stock Trade — a degree reiterated within the report.
“I think we need to take a look at this whole market structure,” he informed senators.
“These platforms are now optimizing based upon our Fitbit, based upon our mobile apps, based upon how we drive our cars, they’re maximizing based on all this data,” he continued. Whereas that might drive innovation, he stated, “could it be a conflict as well if they’re marketing to everybody differently?”
The SEC this summer time issued a request for information on the digital apply of broker-dealers, flagging options like behavioral prompts, differential advertising and game-like options.
Monday’s report additionally criticized the long-standing practices of off-exchange trading and brief promoting, noting that “improved reporting of short sales would allow regulators to better track” worth dynamics. Nonetheless — maybe in a disappointment to some of the buyers who purchased GameStop shares to punish the monetary elite — the SEC’s workers stated it would not consider hedge funds have been broadly affected by investments within the firm and different meme shares.
The Related Press contributed reporting.
