GameStop report illustrate 'no evidence' of gamification or payment for order flow fueling trading frenzy

Brian Sozzi, Brian Cheung, and Julie Hyman discuss the SEC's critical takeaways from finally releasing the report on GameStop trading and the possible ripples this report will have on the market.

Video Transcript

JULIE HYMAN: Well, the meme stock frenzy has subsided, and it's only just now that the Securities and Exchange Commission has come out with its report examining, in particular, the frenzy that kicked off with GameStop and trying to figure out, does anything need to be done, changed in the system? Was there anything systemic that kind of went awry there? And it seems like, Brian Cheung, the conclusion is mostly, no, we're good, right? I mean, is that-- am I reading that correctly?

BRIAN CHEUNG: I mean, that sounds about right. Eight months of built-up anticipation over what the major regulator was going to say in response to the crazy debacle that was the late January GameStop situation, and really, the report has no recommendations for what the agency should do or anything that they can actionably kind of follow up with to clamp down or change market structure or anything else, which seems to suggest that maybe the market structure as is, is relatively OK.

Now that doesn't mean that they let everyone off the hook here. Some of the major findings from this report, which was entitled "The Staff Report on Equity and Options Market Structure Conditions"-- in other words, it's the GameStop report-- basically, they flagged payment for order flow again. That's one of the reasons for why brokerages can offer $0 commissions. You can watch our Yahoo U on it.

But they said that may be creating incentives for the gamification of stock trading, that things like dropping confetti, virtual confetti, on your app when you make a stock trade, might not be helping the cause here and is being aided by this type of business model, and also flagged restrictions on trades that were largely the result of margin calls. They said that it really was no collusion.

They actually referenced Dave Portnoy in the report, mentioning that there was this kind of rumor and narrative out there that it was hedge funds and maybe the wholesale brokers themselves that were actually pressuring the likes of Robinhood to suspend trading, as we'll recall, on January 28 in the likes of GameStop and AMC.

The SEC report saying that's not necessarily the case. Really, this is just the result of the way that the clearinghouses require brokers to have enough margin on hand. And they also said that there could be things like improved reporting of short sales and then also said that faster settlements in a T plus 1, instead of a T plus 2 system, might help.

But I want to read you just this quick quote that kind of summarizes the essence of this report. The SEC saying, quote, "People may disagree about the prospects of GameStop and other meme stocks, but those disagreements are what should lead to price discovery, rather than disruption."

So, again, the summary of the report saying markets should be efficient here. The SEC is not going to try to bias one way or another towards the brokerages or the investors themselves, but that there can't be market frictions that create any sort of weirdness here. You have to make sure that the SEC is allowing the markets to operate as smoothly as possible. So that being the big takeaway of this 45-page report, guys.

BRIAN SOZZI: Brian, any readthrough on payment for order flow?

BRIAN CHEUNG: Yeah, well, I mean, there was chatter at one point through that Barron's interview a few months ago that SEC chair Gary Gensler was considering banning payment for order flow entirely. The sources that I've talked to have said it's not necessarily that that's a serious item for consideration for the SEC to go down in terms of policy, but that they wouldn't want to take anything off the table. So it seems like, yes, even though that's a possibility, there are a lot of legal challenges there.

For example, whether or not the SEC has the authority to full-on ban payment for order flow. The big story here, again, is that it's not the SEC that feels like payment for order flow is illegal. It's certainly a legal structure. And in fact, many people inside the SEC might not have any sort of issue with the idea of these rebates from the wholesale market makers going back to the brokers like a Robinhood, which allows them to ultimately allow no-fee trades on these platforms.

But again, the SEC is just asking the question, is this the most efficient way to be doing it? Is payment for order flow incentivizing brokers to try to maximize the amount of trades that they have on their platform so that they can get more arbitrage from the wholesale market maker like a Citadel Securities? That remains a question that the SEC could further investigate after this report.

JULIE HYMAN: What's also interesting to me, Brian-- Brians-- is that in this age of this increased scrutiny of Facebook and its various platforms and how effectively the algorithms they use manipulate psychology-- I think we can say that-- in order to get people to engage more and more, that there's not more focus on, yes, the confetti is a silly thing, but things like that and the gamification.

It's interesting that there is not that increased scrutiny and examination of it at the same time that we are getting it in other areas. I mean, I think you can argue that stock trading or trading of whatever has some of those qualities naturally, but the question is, are they enhanced and to dangerous effect--

BRIAN CHEUNG: Well, Julie--

JULIE HYMAN: --by these kinds of apps? And this doesn't seem to address that.

BRIAN CHEUNG: No, I think this brings up a really good point, though, which is what is the difference between the way that, you know, there might be social engineering on an Instagram platform versus social engineering on the Robinhood platform? And I think the difference is that one of them has money attached to it in these types of transactions.

And I think that's a big reason why there are guardrails. It's not the SEC that's doing it. But there are guardrails around sports gambling platforms that are now available on your phone now as well. So I feel like that's the big reason why the SEC is trying to step in here. I don't know if they have behavioral psychologists on hand that can assess what's a dangerous type of behavioral feedback on an app versus a healthy one, but I think that's going to be a big question for a lot of these types of regulatory issues that are facing you just on your phone now these days.

JULIE HYMAN: Here's a scoop alert. Maybe we should keep an eye on the SEC job postings board, see if they're hiring any behavioral psychologists--

BRIAN CHEUNG: That's a good idea.

JULIE HYMAN: --and that sort of thing. You know, as we're talking about the SEC, I just wanted to refresh our viewers' memories, although it just happened 10 minutes ago, that that Bitcoin futures ETF is now trading because that is, obviously, a topic for the SEC as well. Are they going to approve more of these? What's interesting here is that the underlying asset, of course, to this particular ETF is regulated not by the SEC itself, but by the CFTC. And the underlying asset to that, Bitcoin itself, well, that's not really regulated by anyone at this point.

So there are going to be a lot of questions. I mean, in other words, to some extent, this GameStop report is old news, to your point about having taken them nine months or whatever it was to put it together, but there are going to be a lot more questions for the SEC about how it's regulating all of these new financial trends, of course, not just meme stocks.