In a new report, the SEC reviewed regulatory issues involving GameStop trading in January 2021.

The SEC concludes that the GameStop event requires the agency to give further consideration to:

  • Shortening the Settlement Cycle. The SEC explained that shortening the settlement cycle could mitigate the effects of "acute margin calls on more thinly-capitalized broker-dealers" without diminishing the role of clearinghouses in risk management.
  • Broker-Dealer Strategies to Increase Customer Trading. The SEC highlighted the correlation between the incentives created by payment for order flow and increased use of digital engagement practices.
  • Dark Pools and Wholesalers. The SEC underscored that wholesalers, who increasingly handle individual investor order flow, face fewer transparency requirements than exchanges or alternative trading systems.
  • Short Selling. The SEC recommended improved short sales reporting to better understand how shorting affects price dynamics.

SEC Commissioners Hester M. Peirce and Elad L. Roisman criticized the report as too narrative, "awkwardly intertwining" an account of the events with unrelated, SEC-level policy discussions. Ms. Peirce and Mr. Roisman asserted that the report "finds no causal connection between the meme stock volatility and conflicts of interest, payment for order flow, off-exchange trading, wholesale market-making, or any other market practice that has drawn recent popular attention."

Ms. Peirce and Mr. Roisman argued that policy discussions should consider both the operations of the equity market and previous SEC actions. As to payment for order flow, they argued that before any action the SEC must take into account (i) the cost saving benefits for investors, (ii) the potential for conflicts and (iii) recently finalized SEC rulemakings, which narrowed quoted spreads and improved the display of odd-lot quotations.

SEC Chair Gary Gensler summarized the report's conclusions, stating that review of the GameStop event presents the SEC with opportunities to consider how the SEC can further "efforts to make the equity markets as fair, orderly, and efficient as possible."


GameStop is a great story that should be made into a movie. The report misses the significant aspects of the story: that one guy sitting in his basement was able to capture the attention of thousands of retail investors who communicated with each other on Reddit, away from the regular structured means of interchange intermediated by regulated entities, and move the markets in a big-time way.

The GameStop story is not about whether the settlement cycle should be shortened. The report should have been about the ways in which retail investors get information, trade on that information, and exchange information. (See also  GameStop: Regulators Should Focus Less on "Solving the Problem"; More on "Improving the Situation".)

Primary Sources

  1. SEC Press Release: SEC Staff Releases Report on Equity and Options Market Structure Conditions in Early 2021
  2. SEC Staff Report on Equity and Options Market Structure Conditions in Early 2021
  3. SEC Statement, Gary Gensler: Staff Report on Equity and Options Market Structure Conditions in Early 2021
  4. SEC Joint Statement, Hester Peirce and Elad Roisman: Statement on Staff Report on Equity and Options Market Conditions in Early 2021
  5. Bloomberg: The SEC Is Baffled By GameStop Too
  6. SIFMA Statement on SEC Staff Report on Equity and Options Market Structure in Early 2021

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