John McCrank

NEW YORK (Reuters), The U.S. Securities and Exchange Commission is set to release soon its much-anticipated report on GameStop trading. It could have important implications for brokers, wholesale market builders, exchanges and retail investors.

SEC will address issues surrounding market chaos that occurred in February when prices plummeted due to excessive trading by commission-free retail brokerages. GameStop Corp (NYSE:) And other “meme stocks”, to highs that push hedge funds who had been betting against them.

Numerous brokerages halted trading of the affected stocks amid intense volatility. It angered traders as well as boosted market confidence.

The following are topics that the SEC stated it was monitoring:

GAMIFICATION IN TRADING

Gary Gensler (SEC Chair) has expressed concern about the “gamification” of trading through commission-free retail brokers. This could lead to more trading that is best for investors.

Gensler emphasized the use of machine learning, predictive analytics and artificial intelligence by retail brokerages to promote customized products and increase revenues.

After being criticized by regulators and politicians, Robinhood (NASDAQ) Markets removed confetti animation from its trading app in March. It had been used to mark users’ first trades.

PAYMENT FOR ORDER FLLOW

Gensler is critical of Payment for Order Flow (PFOF) and the practices of retail brokers such as Robinhood. Charles Schwab (NYSE:) Corp. In return for payment, most orders are sent to wholesale marketmakers rather than exchanges.

Gensler has said PFOF raises potential conflicts and has questioned https://www.sec.gov/news/speech/gensler-global-exchange-fintech-2021-06-09 whether brokers are incentivized to encourage their customers to trade more frequently to maximize the payments.

PFOF supporters claim that it was a significant reason many brokerages could stop charging trading commissions. This led to a boom in retail trading. PFOF is responsible for most of Robinhood’s income.

PFOF supporters claim it is beneficial to retail traders, as wholesale brokers can execute trades at better prices than those found on the exchanges.

Gensler said however that exchanges no longer provide the ideal price for stock prices. However, this means the exchanges’ best prices may not reflect the market sentiment. Wider bid-ask spreads can be detrimental to all investors.

MARKET MAKER CONCENTRATION

The GameStop saga highlighted the small number of market-makers that dominate the retail market, with Citadel Securities executing around 37% of all U.S.-listed retail volume https://www.citadelsecurities.com/products/equities-and-options. Gensler stated that it could lead to competition issues.

EXCHANGE PRICES

Nearly half all trades occur away from exchanges. Market makers can offer fractional improvements of up to one penny on their bids or offers. Exchanges are limited to quoting in pennies. Gensler says this creates an unfair playing field.

Sub-penny rules, which limit the exchange of penny quotes to one per cent were established in 2005 to address concerns about sophisticated traders using smaller pricing increments for their own advantage.

CLEARINGHOUSES and SETTLEMENT TIMES

The January volatility of “meme” stocks caused the post-trade clearinghouse, which guarantees trades to request billions of dollars worth additional collateral from retailers trading platforms.

Many brokers banned trading in these stocks. There was speculation that they were protecting hedge funds, which could lose their investment if the stock rose.

Vlad Tenev from Robinhood argued that this problem is primarily due to the two-day processing time it takes for trades to be settled. Settlements would have taken place in real time so collateral wouldn’t have been an issue.

Gensler has indicated https://www.sec.gov/news/speech/gensler-global-exchange-fintech-2021-06-09 he is in favor of shortening the settlement cycle.

SHORT SALE DISCLOSURES

Many of the shares in the GameStop story were heavily shorted. A strategy to predict a fall in stock prices. GameStop had more than 140% short-interest, meaning that there were more shares available than they could trade.

This is feasible on paper, because shares can be borrowed for short-term trading and sold back to the market. The new owner has no knowledge that they have been shorted and may lend the shares out just like the former owner.

Gensler stated that he is considering increased disclosure regarding short-selling and securities lending.