The GameStop Scandal That Wasn’t

An SEC staff report finds no evidence of market manipulation

WSJ editorial.

"Cleanup in aisle 7! Some days we feel like the grocery store mop brigade wiping up after the political class erupts in a tempest that leaves a mess of falsehoods on the floor. The latest example is the Securities and Exchange Commission staff report that failed to find a scandal in the trading this year in GameStop and other “meme” stocks.

Multiple stocks in January surged in price as retail investors shared bullish tips on social media. “Some in the media directly linked trading activity to the presence of short interest, characterizing trading in GameStop as an act of rebellion intended to humble short-selling professional investors who had allegedly targeted the stock,” says the SEC report published Monday.

Alarmists claimed sophisticated investors were egging on day-traders to squeeze short-sellers, but the report doesn’t show market manipulation. “The underlying motivation of such buy volume cannot be determined,” the report says, adding that “it was the positive sentiment, not the buying-to-cover [of short sellers]” that fueled GameStop’s price spike. In short, blame the madness of crowds.  

Several brokerage firms limited trades of GameStop and other meme stocks as prices became more volatile. Some excitable Members of Congress, including Alexandria Ocasio-Cortez, suggested that the firms were pressured by hedge funds and other commercial partners such as Citadel Securities. There’s no evidence in the report to support this.

The report confirms what brokers said at the time: They were reacting to margin calls and capital charges by the National Securities Clearing Corp. On Jan. 27 “NSCC made intraday margin calls from 36 clearing members totaling $6.9 billion, bringing the total required margin across all members to $25.5 billion,” the report says.

The SEC staff take pains not to emphasize the failure to turn up market manipulation or systemic risks. They know new SEC Chairman Gary Gensler wants to use the meme stock craze to justify more regulation of off-exchange trading and payment-for-order flows, which brokerage firms use to subsidize zero-commissions for retail investors.

But as two Republican SEC commissioners note in a statement, “it does not appear that many conclusions can be drawn from the data.” And 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.”

On to the next non-scandal of prices changing and markets working."