US markets performed well during GameStop volatility in January, while short selling was not the main cause of the unprecedented rise in “same stock” according to a long-awaited report by the Securities and Exchange Commission (SEC) .
The report released on Monday provides a post-mortem of how amateur traders using commission-free retail brokers took GameStop and other popular stocks to extreme highs, crushing hedge funds that had bet against them.
Amid the intense volatility, several brokerage houses restricted trading in the affected stocks, slowing the recovery, infuriating retail traders, sparking outrage from policymakers and leading to a hearing in Congress.
Despite the series of extraordinary events, the Commission concluded that the basic plumbing in the market remained “good,” an SEC official said.
Massive short compression
A key account of the GameStop incident is that an army of retail traders triggered a huge short-term squeeze by pushing up stocks that hedge funds were betting against. They did this by flooding the market with buy orders, forcing hedge funds to also have to buy stocks to cover their shorts, pushing GameStop even higher.
Short sellers borrow shares from brokers and then sell them in the market, with the agreement that they will buy back the shares and return them to the lender at a later date. If the price has fallen, the short seller can buy back the shares at a lower price than he paid for them, thus locking in a profit.
When a severely shorted security soars, short sellers are forced to buy back the securities at higher prices to close their positions, pushing the security even higher, known as a “short squeeze.” .
Still, the SEC said this story is not fully supported by evidence. GameStop purchases by those covering the shorts represented “a small fraction of the overall purchase volume” and the company’s stock price has remained high even after the direct effects of these transactions should have worn off, depending on the regulator.
Manipulation and pressure on social networks
The report does not answer several outstanding questions, including whether bad actors have manipulated social media to generate positive sentiment in GameStop, or whether hedge funds have attempted to pressure retail brokers to restrict trading in GameStop. , which all parties involved denied.
Gabe Plotkin’s Melvin Capital is perhaps the biggest victim of optimistic investors who have banded together on Reddit and other social media platforms to push GameStop higher. The hedge fund had a big short sale on GameStop and its January losses led the company to get a $ 2 billion injection from Ken Griffin’s Citadel and roughly $ 750 million from Steve Cohen’s Point72 Capital Management. Still, the SEC said hedge funds mostly escaped the situation unscathed.
“Staff believe that hedge funds have generally not been significantly affected by investments in GME and other memes stocks,” the regulator said in its report. “Staff did not observe that private and registered fund advisers had encountered liquidity issues or difficulties with counterparties.”
Then there was the hotly debated topic of whether hedge funds pushed Robinhood to block clients from adding to their GameStop positions in late January as the stock skyrocketed.
Robinhood has repeatedly argued that it has halted buy orders due to requests from its clearinghouse that it has posted more capital to deal with the increased risk. The issue came to the fore when Robinhood chief executive Vlad Tenev faced an avalanche of questions from lawmakers during a House hearing in February.
In its report, the SEC noted that clearing houses were asking for billions of dollars in additional margin from member firms and brokers were temporarily banning clients from buying additional shares.
Agency chairman Gary Gensler told Congress earlier this year that the agency would address other issues raised by the saga, including disclosures of short sales, game-style negotiation prompts used by brokers and brokers’ practice of sending client orders to wholesale market makers for a fee.
“The events of January gave us the opportunity to consider how we can continue our efforts to make the stock markets as fair, orderly and efficient as possible,” Gensler said in a statement on Monday.