The U.S. Securities and Exchange Commission (SEC) is still weighing its response to the frenzy over meme stocks, but its leader acknowledged that investors were among the losers when brokerages abruptly restricted trading in late January.
“Restrictions on trading that fateful Friday in January was not good for the retail investors that wanted access to the markets,” said SEC Chair Gary Gensler during Yahoo Finance's All Markets Summit.
That “fateful Friday” was Jan. 29, when several brokerages restricted trading in GameStop and other meme stocks that were getting attention on the WallStreetBets reddit thread.
Retail investors barred from buying more securities were baffled by the fact that they could still sell or close those positions, fueling theories that hedge funds and wholesale market-makers were coercing brokerages into stopping the meteoric rise in meme stock share prices.
The SEC, however, released a report last week attempting to debunk that narrative. The report notes that restrictions were largely the result of a spike in margin requirements that clearinghouses (who actually settle trades themselves) required the brokerages to hold given the massive volatility in those stocks.
The report suggested that shorter settlement times could reduce the likelihood of unexpected margin requirements — and thus the need to restrict trading — in the future. But the report detailed no specific policy actions going forward.
Banning payment for order flow
Gensler told Yahoo Finance that among other policy considerations, banning the practice of payment for order flow remains an option.
The model, which has enabled zero-commission trades popularized by Robinhood, relies on routing orders through wholesale market-makers like Citadel Securities and Virtu Financial. Those middlemen firms try to execute trades at better prices than the customer asked for, splitting the cost savings among itself and the brokerage that routed the order.
Gensler said "inherent conflicts" may incentivize brokerages to gamify stock betting to increase the volume of trading.
“When you have efficiency, it’s lower cost in the middle, that’s better for companies raising money and it’s better for the investor,” said Gensler, referring to possible changes to the payment for order flow model. “It may mean there’s a little less economic rent for folks in the middle.”
Gensler said that the SEC broadly supports retail investing, noting that families should be enabled to use stock market bets if they want to build a nest egg for retirement, among other reasons.
“Retail being part of the [investing] mix — and a growing part of the mix — can be good as long as there’s a real cop on the beat looking at the rules in place,” Gensler said.