London (CNN Business) - In late January, there was one question on the minds of investors: How did a struggling mall-based video game retailer became Wall Street's hottest stock, seemingly overnight?
Now, after months of research, the industry's top regulator has answers — and its findings could pave the way for major reforms to how financial markets function as amateur traders remain a powerful force.
What's happening: The US Securities and Exchange Commission just released a44-page reportexaminingGameStop(GME)mania, the early 2021 phenomenon in which the company's shares, plugged by enthusiasts on social media, rocketed about 2,700% in a matter of weeks.
Other companies, including movie theater chain AMC Entertainment(AMC), electronics company Koss(KOSS) and clothing chain Express(EXPR), also logged astronomical gains as online hype reached a fever pitch.
The report is full of interesting findings about the so-called "meme stock" craze. Here are some of the highlights.
It really was wild.The SEC found that the number of unique accounts trading GameStop on a given day rose to nearly 900,000 by Jan. 27, up from fewer than 10,000 at the beginning of the month.
And the volume of stock changing hands was massive. Between Jan. 13 and Jan. 29, an average of 100 million GameStop shares were traded per day, up 1,400% from the 2020 average.
The action wasn't just limited to GameStop. More than 100 stocks "experienced large price moves or increased trading volume that significantly exceeded broader market movements," the SEC said.
Some theories were off. One reason GameStop generated so much attention was because it fit a compelling David versus Goliath narrative, in which a band of renegade traders coordinating on platforms like Reddit successfully took on big hedge funds that had placed bets against GameStop. When the company's share price rose dramatically, those hedge funds allegedly had to buy stock in the company to cover their positions, triggering even bigger gains.
That did happen. But the SEC found that "such buying was a small fraction of overall buy volume," and that it was "positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."
Robinhood is under the microscope. The SEC thinks regulators should take a closer look at how popular trading apps function. That could put pressure on the company, which went public in July.
"Consideration 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," the report said.
The SEC also said the practice at the center of Robinhood's business model, known as "payment for order flow," could compel the company to find "novel ways to increase customer trading."
When an investor places an order to buy a stock on its app, Robinhood routes the order to a market maker like Citadel Securities, which then handles execution — and pays Robinhood for that privilege. SEC Chair Gary Gensler has previously indicated he's skeptical of payment for order flow.
Big picture: The report didn't include specific policy recommendations. But it could help Gensler's SEC eventually make changes to how markets function.
"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," Gensler, who was nominated by President Joe Biden, said in a statement Monday.
But SEC Commissioners Hester Peirce and Elad Roisman, who are Republican appointees, said in a separate statement that the report went too far.
"In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record," they said, adding that the report, "finds no causal connection between the meme stock volatility" and a practice such as payment for order flow "that has drawn recent popular attention."