Daily Brief - SEC to retail investors: it’s your fault! (Oct 19, 2021)

Let’s rewind back to that cold January 2021. ​​It was a relatively quiet month, excluding a disputed presidential election, a violent mob storming the US Capitol, saber rattling in the Pacific, and a renewed surge in COVID.

Suddenly, the WallStreetBets-fueled surge in GameStop stock sees the shares in a long-struggling video game retailer explode over 2,000% higher in a matter of days. Short sellers are covering frantically (mostly hedge funds) as more investors pile into the meme stock. Brokerages band together to stop this retail investor revolution and block trading in the stocks. Using dirty tricks, Goliath beats David.

Or does he?

The conspiracy theories peddled in the aftermath of the shock price volatility have the credibility of UFO sightings, according to the eagerly-awaited SEC report released yesterday. Not known for the brevity of its reports, SEC once again doesn’t miss the opportunity to use a full 44 pages to conclude that, well, nothing happened.

Most notably, the SEC concludes that margin calls and capital charges assessed by clearing companies (that actually settle the trades themselves), rather than hedge funds, forced brokerages to restrict trading.

The SEC staff also casts doubt on the idea that GameStop prices were driven by market makers (the likes of Citadel Securities) buying stock to hedge against options contracts that they themselves wrote (called a “gamma squeeze”).

Finally, the SEC concludes that “naked” short selling (an illegal practice whereby the sellers sell a stock they have neither located nor borrowed) also didn’t play a role in GameStop price dynamics. In their report, the authors argue that GameStop “did not experience persistent” problems with trades actually clearing.

In summary: the stupendous rally in GME wasn’t due to irresponsible hedge fund short selling, Citadel gamma squeeze, or brokerage collusion. It was simply due to, err, how do we put it: more buyers than sellers?

Move along folks, nothing to see here.