SEC Staff Releases Report on Equity and Options Market Structure Conditions in Early 2021

The SEC published a Staff Report on Equity and Options Market Structure Conditions in Early 2021, which focuses on the January 2021 trading activity of GameStop Corp and other “meme stocks” and provides an overview of the equity and options market structure for individual investors. “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,” said SEC Chairman Gary Gensler. According to the SEC, meme stocks experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual investors filled social media. Then, as the end of January approached, several retail broker-dealers temporarily prohibited certain activity in some of these stocks and options. The SEC asserted that GameStop’s stock experienced a confluence of all of the factors that impacted the meme stocks: (1) large price moves, (2) large volume changes, (3) large short interest, (4) frequent Reddit mentions, and (5) significant coverage in the mainstream media. The staff report concludes with the staff identifying areas of market structure and the regulatory framework for potential study and additional consideration. These include:

  1. Forces that may cause a brokerage to restrict trading;
  2. Digital engagement practices and payment for order flow;
  3. Trading in dark pools and wholesalers; and
  4. The market dynamics of short selling.