The Securities and Exchange Commission released a 45-page report on Monday offering no specific policy recommendations following the early 2021 frenzy over GameStop (GME) stock.
However, the report leaves the door open to “additional consideration” on matters like the "digital engagement practices" that brokerages may be using to glorify risky stock trading.
Robinhood (HOOD), for example, drew scrutiny for using digital confetti to celebrate trades, a practice it abandoned as some criticize brokerages for actively encouraging gambling.
The report says these practices may be incentivized by the industry model of payment for order flow, where brokerages route orders through wholesale market-makers. SEC Chair Gary Gensler has not ruled out the possibility of a full ban on the model.
[Read: How do brokerage firms make money]
Responding to the SEC report, Robinhood said there is "no evidence" that either payment for order flow or gamification were to blame for the events of Jan. 28.
"We look forward to continuing to engage with the SEC to ensure the markets remain accessible and affordable for all," a Robinhood spokesperson added.
The SEC also suggested improved disclosures on short positions to better monitor unusual price dynamics, as well as shorter settlement cycles that could reduce the likelihood of brokers having to impose controversial trading restrictions.
SEC staff emphasized the agency’s job is to ensure fair, orderly, and efficient markets — not to stamp out price volatility.
“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,” the report reads.
Senior SEC staff said the report was not designed to make specific policy actions, making it unclear if there are immediate implications for the SEC’s approach to the brokerages, hedge funds, clearinghouses, or wholesale market makers that were engulfed in the episode.
Flashback to January 2021
Most of the staff report recaps the WallStreetBets-fueled surge in GameStop stock in January 2021. Short sellers were forced to cover their positions as more investors piled into the meme. In a matter of days, shares of GameStop, a long-struggling video game retailer, had exploded over 2,000%.
[Read: What is short selling?]
A lot of controversy lies in what happened after the initial pop.
Some brokers started imposing restrictions on the ability to buy — but not sell — meme stocks. The likes of Barstool’s Dave Portnoy started sparking theories about hedge funds and wholesalers pressuring the brokerages to stop the run-up in meme stocks.
The SEC report suggests otherwise, noting that margin calls and capital charges assessed by clearing companies (that actually settle the trades themselves) largely forced brokerages to restrict trading.
The SEC noted, however, that clearing requirements were not behind all the restrictions. For one unnamed brokerage, “capacity issues” in generating unique IDs for stock orders apparently pushed it to restrict customers from buying GameStop and movie theater chain AMC, another meme stock, for a brief period.
The report also casts doubt on the idea that GameStop prices were driven by market makers (i.e. Citadel Securities) buying stock to hedge against options contracts that they themselves wrote (called a “gamma squeeze”). The SEC also ruled out the role of “naked” short selling in GameStop price dynamics, insisting that GameStop “did not experience persistent” problems with trades actually clearing.
The staff report concludes by noting that “broad participation” remains a critical feature of securities trading in the modern era, reminding market participants of what’s at stake when price volatility arises.
“Underneath the memes are actual companies, with employees, customers, and plans to invest in the future,” the report reads.
Story updated to include statement from Robinhood.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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