In response to the Reddit-fueled GameStop (GME) trading bonanza in late January, the Securities and Exchange Commission (SEC) will begin examining the payment for the order flow practice used by many electronic brokerage firms for their profit, according to a statement from SEC Acting Chairwoman Allison Herren Lee.
Payment order flow allows online brokers such as Robinhood or Charles Schwab to make money by selling customers’ trading orders to other investment firms. It has come under scrutiny in recent weeks as a record-breaking number of individual retail investor accounts have opened up this year, according to JMP Securities data. Some 10 million new accounts were created, many of which were for Robinhood.
Lee said regulators should ensure that these trading practices are fully disclosed and “consistent with best execution obligations.”
The letter was sent as a response to Democratic Senator Elizabeth Warren’s (D-MA) request to the SEC to look into the matter after bull raids on stocks like GameStop and AMC caused extreme market volatility at the beginning of the year.
Last month, major players involved in January’s stock market insanity testified in Congress. Witnesses including Jennifer Schulp, Director of Financial Regulation Studies at the Cato Institute; Vladimir Tenev, CEO of Robinhood Markets; Gabriel Plotkin, CEO of Melvin Capital Management; Steve Huffman, CEO and Co-Founder of Reddit; Kenneth Griffin, CEO of Citadel; and Keith Gill, a member of the WallStreetsBets Reddit forum who goes by “Roaring Kitty.”
“This recent market volatility has put a national spotlight on institutional practices by Wall Street firms and prompted discussion about the evolving role of technology and social media in our markets,” said Rep. Maxine Watters (D-CA), chairwoman of the House Financial Services Committee, during the hearing on Feb. 19.
On Jan. 25, GameStop shares were up over 150% in opening hours and continued to skyrocket throughout that week. The struggling video game retailer – whose share prices had broadly trended downward since 2015 – was fueled by investors taking cues from each other to brute force the stock’s share price to new highs.
The Reddit WallStreetBets community achieved its goal in pushing back against analyst recommendations to short GameStop stock while also cashing in on their investments. One WallStreetBets member posted a screenshot of their massive returns to the subreddit, showing they made $3.8 million as of Jan. 26.
The events point to a broader trend that may define the capital markets environment for 2021 and possibly years to come. James Surowiecki, a business columnist for Marker, a Medium publication, called the events a “meme stock” bubble.
“What’s happening with GameStop looks less like a speculative bubble and more like a contemporary, internet-mediated version of the ‘bull raids’ that were characteristic of the stock market in the early 20th century, when organized pools of investors would combine to drive stock prices up,” he wrote in a Jan. 26 story. Such bull raids were a prime component that led to the Great Depression in 1929.
The events prompted the controversial decision for brokerages, including Robinhood and TD Ameritrade, to place restrictions on transactions with GameStop, AMC, and other securities, citing “unprecedented market conditions and other factors” out of an abundance of caution.
GameStop shares surged again on March 10 during midday trading to nearly $350 but dropped 40% shortly after. GameStop is taking its first steps to transition to e-commerce, according to reporting from CNBC. s Chewy co-founder Ryan Cohen will take charge of a new transition committee.
