SEC issues GameStop (GME) report on what happened in January 2021

The most anticipated SEC report in history has finally been issued, and it's almost about as anticlimactic as today's Apple Special Event.


The United States Securities and Exchange Commission (SEC) has finally filed their report on GameStop and the meme stock short squeezes of January 2021. We are still parsing all of the information provided in the report, but this article will contain some of the bigger points. 

Here's a link to the entire SEC GameStop report. Let's break down some key points in the SEC's findings here:

  • Nearly 900,000 individual accounts traded GameStop shares on January 27
  • While a short squeeze did not appear to be the main driver of events, and a gamma squeeze less likely, the episode highlights the role and potential impact of short selling and short covering
  • Staff did not find evidence of a gamma squeeze in GME during January 2021
  • Some commentators have asked how short interest can get as high as it did in GameStop. Short interest can exceed 100%—as it did with GME—when the same shares are lent multiple times by successive purchasers 
  • When examining short interest as a percent of shares outstanding, GME is the only stock that staff observed as having short interest of more than shares outstanding in January 2021
  • Staff observed that during some discrete periods, GME had sharp price increases concurrently with known major short sellers covering their short positions after incurring significant losses
    • For example, staff observed that particularly during the earlier rise from January 22 to 27 the price of GME rose as the short interest decreased
  • Staff found GME did not experience persistent fails to deliver at the individual clearing member level
  • While a short squeeze did not appear to be the main driver of events, and a gamma squeeze less likely, the episode highlights the role and potential impact of short selling and short covering
  • The vast majority of GME stock trades executed off exchange in January 2021 were internalized (approximately 80%) as opposed to executed on ATSs
    • The market for internalization of GME was highly concentrated, with 88% of internalized dollar volume in January executed by just three wholesalers
      • Citadel Securities accounted for nearly 50% of internalizer dollar volume during the month, rising to as high as 55% of daily internalized dollar volume twice
        • For example, Citadel internalized an average of just under $37 million of GME per day in December 2020. On January 27, Citadel internalized nearly $4.2 billion of GME
      • Virtu Americas accounted for approximately 26% of the internalized volume during January
        • Virtu internalized an average of $23.4 million of GME each day in December 2020 and $2.2 billion of GME on January 26
      • On January 29, Citadel internalized approximately $2.2 billion of GME stock, while Virtu internalized approximately $1.4 billion
  • Conclusion
    • 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. 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. There are many different types of investors, and they buy and sell stocks for many different reasons. However, when share prices change rapidly and brokerage firms suddenly suspend trading, investors may lose money.
    • Underneath the memes are actual companies, with employees, customers, and plans to invest in the future. Those who bought GameStop became co-owners of a company through a system of mutual trust and participation that sustains our economy. 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. These events present an opportunity to reflect on the market structure and regulatory framework and identify additional areas for potential study and further consideration in the interests of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
  • Potential areas for new regulation:
    • Forces that may cause a brokerage to restrict trading.
      • A number of clearing brokers experienced intraday margin calls from a clearinghouse. In reaction, some broker-dealers decided to restrict trading in a limited number of individual stocks in a way that some investors may not have anticipated. This episode highlights the integral role clearing plays in risk management for equity trading, but raises questions about the possible effects of acute margin calls on more thinly capitalized broker-dealers and other means of reducing their risks. One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.
    •  Digital engagement practices and payment for order flow
      • 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. In addition, payment for order flow and the incentives it creates may cause broker-dealers to find novel ways  ways to increase customer trading, including through the use of digital engagement practices
    • Trading in dark pools and through wholesalers
      • Much of the retail order flow in GME was purchased by wholesalers and executed off exchange. Such trading interest is less visible to the wider market—and payments to broker-dealers may raise questions about the execution quality investors receive. Further, though wholesalers increasingly handle individual investor order flow, they face fewer requirements concerning their operational transparency and resiliency as compared to exchanges or ATSs
    • Shortselling and market dynamics
      • While short selling and calls on social media for short squeezes received a great deal of media attention, the interplay between shorting and price dynamics is more complex than these narratives would suggest. Improved reporting of short sales would allow regulators to better track these dynamics

Not sure how to feel about this report.
Not sure how to feel about this report.

Today's SEC GameStop (GME) report seems to have omitted a lot of things that r/WallStreetBets traders were looking for. While the regulatory agency is certainly gearing up for implementing new laws surrounding Robinhood's pay-for-order-flow (PFOF) business model, one topic that was barely touched upon of the 45-page report was any suggestion on how to improve short selling dislosure. The SEC described GME's short interest in January, pointing out that it was the only Reddit meme stock with a over 100% of its share float shorted. "Until recently, short interest of more than 90% was observed only a few times—in 2007 and 2008," says the report, but the SEC has not really explained how they plan to prevent this phenomenon from occuring again. The report discusses naked short selling, but really focuses on potential regulations surrounding Robinhood and market makers Citadel Securities and Virtu Financial.

There is not much here for GameStop shareholders to celebrate today. Much of this report is a blow-by-blow break down of a lot of the things that Reddit meme stock investors already knew, and had been repeatedly lampooned about in the mainstream media over. The SEC also seems to contradict itself at times in the report when they tapdance around the topic of the effect of short selling on GameStop's volatile January. One main takeaway from today's news is that individual investors should not hold out hopes that Wall Street regulators have their backs. If the mother of all short squeezes is to continue, traders and investors will have to remain strong together as they continue to take over the float of GameStop.

This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.

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