SEC releases 45-page report on Gamestop

Yahoo Finance's Brian Cheung breaks down the major takeaways from the SEC report.

Video Transcript

SEANA SMITH: While we were in that panel, we got some breaking news out. The SEC releasing its long awaited report on GameStop's trading frenzy. Brian Cheung got a copy of this report and joins us now with more on that. Brian.

BRIAN CHEUNG: Hey, Seana. Well, yeah, as you mentioned, the Securities and Exchange Commission actually releasing this long awaited report, covering the events of January 2021, you'll recall, when shares of GameStop ripped as high as 2,000% after the Wall Street Bets Reddit thread really started pumping up the stock. And we know how controversial it was when, towards the end of January, in the middle of that episode, a lot of these brokerages actually restricted trading on not just shares of GME, but also on many other meme stocks that were also benefiting from the rip-up as well.

Now, what's really interesting is that the report, it's over 40 pages, and it doesn't actually offer any sort of specific policy recommendations for the SEC to actionably take at this time. So it's unclear if there are any sort of real implications for the brokerages and the wholesale market makers, the hedge funds, in some cases, that were really engulfed in this particular issue.

But one thing that was kind of flagged was the role of payment for order flow. We know this is the way that brokerages can offer $0 commissions. Apparently, the SEC was saying that, actually, payment for order flow could be incentivizing some of the gamification tactics that some of these brokerages are using. Recall that, for example, Robinhood used to drop confetti digitally whenever you would make some of your first trades. So the SEC may be saying that could be a no-no, although, again, no specific action here. It's not like the SEC is incorporating any sort of rule making into this.

And then one other interesting thing that's in here is just short-selling. Now we know that there was pressure. A lot of these funds that may have been shorting GameStop stock through this episode were squeezed. We know that short squeezing was maybe one reason why GameStop stock soared as much as 2,000%. SEC saying that some improved disclosures around short-selling might benefit the situation.

And then one other thing that's worth mentioning is settlement trades. We know that the T plus 2 settlement standard, where it takes two days to settle and clear some of these trades that happen in the market, is something that maybe was a reason for why a lot of these margin call and requirements that were set by the likes of the clearinghouses in this structure were a big reason for a lot of the restrictions that were put in place by Robinhood.

So a lot of in-the-weeds financing related issues that are here. But again, the SEC not making any sort of specific recommendations, although they did flag that there could be further consideration on some of these issues that I just laid out, guys.

Adam, I think you might be muted here.

ADAM SHAPIRO: I am muted. I didn't want to interrupt Milken. Are we hearing from any retail investors? You know, any of the influencers, especially in the retail crowd, responding to this report yet? Have they had a chance to digest it?

BRIAN CHEUNG: Not yet. I mean, I've reached out to Robinhood and also Citadel Securities with regards to this. We know that they were major players that were dragged onto Capitol Hill after the GameStop episode earlier in this year. No response quite yet, although we probably wouldn't expect them to say something, given just how high profile this whole situation has been over the course of 2021.

But what is kind of interesting is that, again, it's not like any sort of specific names were dropped in this report. It's not like the SEC called out either Robinhood or Citadel Securities or, for that matter, anyone else that was involved specifically with the GameStop episode. They're not trying to put the liability on anyone. And I think the reason why is because they're making it very clear, senior SEC staff are making it very clear, this was not supposed to be a rule making report or any sort of policy framework, if you will, for exactly how the SEC wants to change up the market structure if they do want to do that.

What is interesting is that, broadly speaking, the SEC just wants to illustrate here what the facts are in the case, exactly what happened, because a lot happened in those weeks in late January and even in some parts of early February. This is just kind of supposed to be a fact book, if you will, that could guide future rulemaking. So it's not like they're saying exactly what's going to happen here. But they just kind of want to use the details of this report to maybe guide future policy making.

SEANA SMITH: All right, Brian Cheung, thanks so much for breaking that down for us. I'm sure this isn't the last that we'll hear of this story. So Brian, thanks so much for following that for us.