SEC’s New Report On GameStop Stock Surge Is Pretty Wild

The SEC stopped short of making any new policy recommendations, but the agency did strongly imply that it would be taking a closer look at Robinhood Markets.

(Photo by Michael M. Santiago/Getty Images)

The last time I visited a GameStop was when the NES Classic Edition came out in 2016. Demand was strong, so I was looking everywhere, even though I still own a mostly functional original NES from the ’80s. I guess, like everyone else, I can’t resist frivolously spending money on nostalgia.

The time before that though, oof, I would have to go way back. Maybe around when “Diablo II” was released? For those of you who didn’t fritter away significant chunks of your teenage years and early 20s on video games, that was over two decades ago.

My experience (or lack thereof) with GameStop is far from unique. Today’s gamers don’t need to go to a strip mall to pick up a cartridge or disk before plugging into their favorite virtual worlds. In the past five years in particular, GameStop has declined accordingly.

Which is why a lot of people were quite surprised to see GameStop’s stock surge by more than 1,600 percent in January.

Hedge funds had heavily shorted GameStop’s stock, but retail investors gathered online to collectively attempt to bid up the stock price and thereby force the hedge funds to dump their short positions. This would theoretically raise GameStop’s stock price even further. The retail crusaders’ strategy worked, to an extent, but regulators and a lot of other Wall Street observers were quite alarmed.

This week, the Securities and Exchange Commission released a detailed report that took an in-depth look at the GameStop stock frenzy as well as surges in other so-called “meme stocks.” In addition to GameStop, other companies that saw ridiculous stock price surges included movie theater company AMC Entertainment (thanks for the $5 movie nights on Tuesdays), the clothing company Express, and Koss, which apparently makes electronics.

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So what did the report find? Well, to me it looks like there were basically just a lot of people who were very bored in COVID-19 lockdown getting together to trade stocks and talk about it on forums like Reddit’s WallStreetBets.

Robinhood Markets eliminated trading commissions for retail investors, and near the end of 2019, Schwab, Fidelity, and other large retail brokers followed suit. Retail investors could make stock trades without paying any price other than assumption of the risk inherent in any stock trade. Combine that with pandemic lockdowns, and the number of trades in certain targeted stocks went through the roof.

By January 27 of this year, there were close to 900,000 unique accounts trading GameStop stock on a given day — it was less than 10,000 at the outset of January. From January 13 to January 29, 100 million GameStop shares, on average, were traded each day, a 14-fold increase from the year prior. The pattern repeated itself with similarly outlandish trading volumes seen for other meme stocks.

The SEC stopped short of making any new policy recommendations in the new report, but the agency did strongly imply that it would be taking a closer look at Robinhood. Specifically, the report stated:

[c]onsideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise.

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It seems a bit far-fetched to think that a little animated burst of confetti or whatever would make a person buy or sell a stock that they otherwise would not have, but I guess it’s worked just fine to keep people plowing their Social Security checks into slot machines over the years.

Ultimately, the report highlighted the need for increased scrutiny of the “payment for order flow” business model employed by Robinhood. The SEC is concerned Robinhood might be incentivizing more trades (through potentially creative and nefarious means) than the organic baseline number of trades (whatever that might be). I hope if regulators bring any type of enforcement action though that they come to the table armed with more than in-app animations.

For now, GameStop’s stock price is still about 1,275% higher than it was a year ago, at around $186 per share. Some short-selling hedge funds were hurt, as were, no doubt, a number of retail investors. Yet, it’s a little hard to argue that, under these circumstances, anyone involved didn’t know what they were getting themselves into.


Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.