NEW YORK, Oct. 1 (Reuters) – The U.S. Securities and Exchange Commission plans to release its long-awaited report on the GameStop business saga soon and it could have implications for brokerages, wholesale market makers, exchanges and retail investors. read more
The SEC report is expected to address the issues surrounding market chaos in late January when a flurry of trading through commission-free retail brokers carried shares of GameStop Corp (GME.N) and other “meme stocks. “popular to extreme maximums, reducing coverage. funds that had been wagered against him. read more
Amid the intense volatility, several brokerages restricted trading in affected stocks, slowing the rally, infuriating retail traders and shaking market sentiment.
Here are some topics the SEC has said it is examining:
THE GAMIFICATION OF TRADING
SEC Chairman Gary Gensler has said “trading gamification” by commission-free retail brokerages is a growing concern because it could encourage more trading than is in the best interests of investors.
Gensler highlighted the use of artificial intelligence, predictive data analytics and machine learning by retail brokerages to drive personalized products to their clients and increase revenue.
In March, brokerage Robinhood Markets (HOOD.O) removed the use of confetti animation in its trading app that had marked users’ first trades, among other changes, following criticism from politicians and regulators. read more
PAYMENT BY ORDER FLOW
Gensler has criticized payment per order flow (PFOF), the practice of retail brokers, such as Robinhood or Charles Schwab Corp (SCHW.N), who ship most of their customers’ orders to wholesale market makers instead. of exchanges, in exchange for payments.
Gensler has said that the PFOF raises potential conflicts and has questioned if brokers are incentivized to encourage their clients to trade more frequently to maximize payouts.
Proponents of PFOF say it’s one of the main reasons most brokerages were able to stop charging trade commissions, helping fuel the retail boom. Most of Robinhood’s income comes from PFOF. read more
Proponents of PFOF say it benefits retail traders because wholesale brokers run their trades at the best prices found on exchanges or better.
But Gensler has said that because many trades now run off exchanges, where stock prices are formed, the best prices shown on exchanges may not accurately reflect market sentiment, which generates wider bid and ask spreads to the detriment of all investors.
MARKET MAKER CONCENTRATION
The GameStop saga highlighted the small number of market makers dominating the retail market, with Citadel Securities running around 37% of all US-listed retail volume.. That could raise competition concerns, Gensler has said.
Almost half of all trades are executed off exchanges. That’s partly due to rules that allow market makers to offer a fractional price improvement of less than a penny on bids and offers, while exchanges have to trade in pennies, which Gensler says has created an uneven playing field.
The “sub-penny rule” limiting trading to penny quotes was enacted in 2005 out of concerns that if smaller price increases were allowed, sophisticated traders could use them to get ahead of retail orders.
COMPENSATION HOUSES AND LIQUIDATION DEADLINES
January’s huge volatility in “meme” stocks prompted the post-trade clearinghouse that guarantees the transactions to demand billions of dollars in additional collateral from retail trading platforms.
In response, several brokers restricted trading in the affected stocks, sparking speculation on Reddit’s WallStreetBets forum that the brokers were protecting hedge funds that would lose out if the shares rallied.
Robinhood CEO Vlad Tenev has argued that the problem was largely due to the two-day period it takes to settle a transaction, and if settlements were in real time, collateral would not have been a problem. read more
Gensler has indicated is in favor of shortening the settlement cycle.
SHORT SALE DISCLOSURES
Most of the shares in the GameStop series were very short, a strategy used to bet that the share price will fall, with more than 140% short interest in GameStop, implying that there were more shares short than were available. to negotiate. read more
That is possible on paper because when the shares are borrowed short and then sold back on 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, just like than above. the owner did.
Gensler has said it is considering further disclosure on short selling and securities lending.
Reporting by John McCrank, Editing by Nick Zieminski
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