By John McCrank and Katanga Johnson

WASHINGTON, (Reuters) – A year ago after “meme stocks” rallies hampered hedge funds and roiled Wall Street’s financial markets, the U.S. Securities and Exchange Commission is taking steps to crack down on several aspects of the equity market.

“The events of last January gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible,” SEC Chair Gary Gensler said on Wednesday.

He was talking about the “Reddit rally”, which is a group of people who are interested in cryptocurrencies. GameStop Corp (NYSE:) along with other “meme stock” on Reddit, and other social media platforms saw extreme spikes in buying prices from investors using Robinhood (NASDAQ) and other non-commission retail brokerages. This led to large losses or “short squeezes” for the hedge funds that had placed bets on shares falling.

Robinhood and other traders had to stop trading the stocks affected by the volatility, which infuriated retail investors as well as dragged down market confidence.

The following are some of the topics that the SEC will be looking into:

DIGITAL TRADING PROMPTS

Gensler has criticised the “gamification” of trading, in which digital platforms and commission-free brokerages encourage trading that uses lights, sounds, notifications, or other psychological tricks common to videogames.

He highlighted also the benefits of predictive data analytics, artificial intelligence and machine learning in pushing products.

In August https://www.reuters.com/legal/transactional/us-markets-regulator-wants-public-feedback-firms-digital-engagement-practices-2021-08-27, the SEC issued a consultation on potential new rules to limit gamification and these other “digital engagement prompts.” The agency is expected to proceed with a rule change https://www.reuters.com/business/finance/will-games-stop-sec-mulls-crackdown-trading-apps-2022-01-26 in coming months.

PAYMENT FOR ORDER FLLOW

Gensler condemned payment for orders flow (PFOF) as a way for commission-free brokers to generate income by selling customer orders to wholesale markets makers, in exchange for payments.

He has floated https://www.reuters.com/article/usa-sec-gensler-markets-idCNL4N2Q13ST a ban on the practice, saying it raises potential conflicts of interest, giving brokers incentives to encourage customers to trade more frequently to maximize the payments.

According to Proponents, PFOF was a key reason that brokerages could stop charging commissions. Retail investors also often receive a better price on retail exchanges than they do on main ones.

CONCENTRATION, PRICING

Gensler said that GameStop’s story showed how few market-makers have a significant influence on the retail industry.

Over 40% of trades are done away from the exchanges. Market makers can offer fractional improvements in price on bids or offers. Exchanges are required to quote in pennies. Gensler believes this creates an unfair playing field.

According to its latest public agenda https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3235&csrf_token=ACE6459BAE38251002FF06695AAC34E8A26DDF9AEFCB5DF139E0DAC4CD05ADBEA9212C833BBEE3FE8C7DC33AC6BDF83B2299, the SEC is considering proposing changes “to modernize rules related to equity market structure such as those relating to order routing, conflicts of interest, best execution, market concentration, and the disclosure of best execution statistics.”

HEDGE FUND DISCLOSURES, SHORT SELLING

Hedge fund transparency was a concern that has been intensified by the GameStop scandal. On Wednesday the SEC proposed https://www.reuters.com/article/usa-sec-hedge-funds/update-2-u-s-hedge-funds-private-equity-firms-to-disclose-more-data-under-sec-proposal-idUSL1N2U61FB new rules to boost hedge fund disclosures on material events, including extraordinary losses.

Many of the GameStop stocks were heavily shorted, which is an investment strategy that bets on a fall in stock prices. While the SEC said in its post-mortem https://www.reuters.com/business/fun-facts-us-sec-report-januarys-gamestop-saga-2021-10-18 of the saga that the available data did not suggest foul play when it came to such short sales, Gensler has said greater transparency of short selling may be warranted.

This rule, which was created under the Dodd Frank Act 2010, will finally be implemented by the agency. It would allow for the expansion of the existing reporting requirements on investment positions to include information about short sales.

SETTLEMENT TIMES

Post-trade clearinghouse, which guarantees trades, demanded that retailers brokerages provide billions of dollars worth additional collateral in order to guarantee trades in the event that either party defaults.

Many brokers restricted trading on the affected stocks as a result.

Vlad Tenev from Robinhood stated the main problem is the delay in trade settlements. He said that if settlements happened immediately, there would be no need for collateral.

SEC has also been considering changes to reduce settlement cycles to just one day.