Earlier this week, the U.S. Securities and Exchange Comission (SEC) released its much-anticipated report detailing the events in January that left Wall Street's collective mouth agape and saw shares of GameStop
The 45-page document details a few key issues that may have underpinned the events of the craze: the pay-to-order flow system, the "gamification" of stock trading on apps like Robinhood
"January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible," wrote SEC chief, Gary Gensler, in a statement accompanying the report.
Gensler has signaled that he plans to address the red flags raised in the agency's findings, although the report itself and his statement offered few policy specifics.
In April, the SEC chief signaled that the commission might take up rules targeting the pay-to-order flow system, with rules that may just ensnare Robinhood and its key partner, Citadel Securities.
In the simplest sense, under pay for order flow brokerages like Robinhood send their trades to market makers, like Citadel.
Citadel buys stocks at a bid price lower than what the buyer is asking; however, the buyer pays their full asking price, allowing Robinhood and Citadel to split the difference.
"These payments can create a conflict of interest for the retail broker-dealer," said the SEC. The commission said the pay for order flow system might incentivize apps like Robinhood to "gamify" their platforms with animations, leaderboards, and reward points.
Such features "are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise," said SEC's report.
Such critiques have circled Robinhood for months. It scrubbed its infamous confetti animation back in March, which would play whenever a stock was traded.
The report also raises questions about the central theory of the meme stock craze - the short-squeeze hypothesis. The idea is that Redditors pushed meme-stocks higher, squeezing hedge funds into buying more shares to cover their bad bets, pushing prices even higher.
"Coverage buys were "only a small fraction of overall buy volume," said the SEC in its report, "...it was positive sentiment, not buying-to-cover that sustained the weeks-long price appreciation of GameStop."
The SEC also said that January 28 trading freeze on key meme stocks reflected market conditions and was not the result of collusion between stricken hedge funds and apps like Robinhood, as some have alleged.
According to the facts, on January 27, Robinhood's main clearinghouse demanded $7 billion in additional coverage from its 36 members in what is known as a margin call.
It can take up to two days to settle a trade, and with meme stocks at peak moonshot at the time, the risk was that millions of frothy retail traders cash out of their positions, potentially leaving Robinhood on the hook for hundreds of millions it did not have.
The SEC acknowledged the margin call as the reason behind the trade restrictions and said that the event raises questions about "thinly capitalized brokers [such as Robinhood] ability to meet margin calls."
The commission suggested that reducing the time it takes to settle trades might minimize risks going forward.
The SEC recently closed public comment concerning the digital engagement practices of online brokers like Robinhood.The agency is currently reviewing the submissions.