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How GameStop Stock's January 2021 Short Squeeze Changed the Markets

By Bernard Zambonin,


Since GameStop's historic short squeeze two years ago, the markets have undergone plenty of scrutiny. Here's what you need to know about the short squeeze's effects on stocks.

In the middle of last year, the U.S. House Committee on Financial Services released an overarching report titled "Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide."

This report was the result of a lengthy investigation based on the "Meme Stock Market Event" that occurred in January 2021 when so-called "meme stocks" such as GameStop ( GME ) - Get Free Report and AMC Entertainment ( AMC ) - Get Free Report experienced unprecedented volatility.

From this report came proposals for new rules to address the specific risks of the events that occurred two years ago — including market structures, liquidity rules, and framework for clearing brokers — along with new rules for short sellers and securities lenders.

Here's what's been going on in the markets since the Meme Stock Market Event.
Figure 1: How GameStop Stock's January 2021 Short Squeeze Changed the Markets

Getty Images

Read also: Should GameStop (GME) Shareholders Keep Direct Registering Their Shares?

The "Short Sale Transparency and Market Fairness Act" Bill

One of the central proposals to come out of the investigation, the House Committee's proposed legislation aims to address several problems in market structures.

The bill , entitled the Short Sale Transparency and Market Fairness Act, is a proposed amendment to the Securities Exchange Act of 1934 to modernize reporting requirements.

This modification will apply to institutional investment managers who have more than $100 million in assets under custody and who are required to file ownership reports with the SEC. Furthermore, the reporting window will be reduced from 45 to 10 days after the end of each month for these asset managers.

Also, the bill requires expanded reporting of direct or indirect derivative positions or interests (including short positions). Currently, hedge funds are required to disclose only their long positions.

However, even though this bill is beneficial to retail investors in general, it is still in the introductory stage and needs to pass through the House and Senate and be signed by the president to become law.

The SEC's Efforts to Modernize Market Structures

The Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, announced late last year the largest proposed change in capital market structures in decades.

According to Gensler, many structures have antiquated legislation dating back to a time when electronic trading was not yet the norm. The SEC chair claims that the structures for small traders today are unfair, and he has listed a series of changes to make the market more competitive.

These changes consist of mandates to:

  1. Level the playing field across different markets: This would involve creating neutral ground for different market parties such as wholesalers, dark pools, and lit exchanges competing for investors' orders to provide the best possible prices.
  2. Ensure that brokers put your interest first: Brokers who receive compensation from market makers for order routing — known as payment per order flow (PFOF) — or have conflicts of interest, would need to provide the best possible price regardless of other interests.
  3. Transparency in execution quality: Provide investors with the ability to purchase from brokers who are the most reliable to carry out their trades.
  4. Update on pricing increments: This would involve making the fees exchanges charge more competitive for customers.

According to the SEC, if the proposed rules are approved, they will be crucial to prohibiting restrictive competition in the trading center, such as when a wholesaler — also known as a market maker — executes segmented orders internally.

The SEC also notes that the public comment period on the proposal is open until the end of March.

How GameStop Shareholders Can Benefit From Proposed Market Changes

Since the beginning of meme mania, investors in GameStop and other meme stocks have demanded greater transparency across the market. Many believe that the lack of transparency has influenced unscrupulous trading practices, such as naked short selling.

One of the reasons why GameStop investors are suspicious that naked short selling is going on is because of a high number of failures to deliver on trading GME shares in the company's recent past.

In addition to GameStop, some micro-cap companies such as Genius Group ( GNS ) , Creatd ( CRTD ) - Get Free Report , and Helbiz ( HLBZ ) have been conducting investigations into short sales of their shares.

Creatd's CEO said that he intends to escalate this issue to the highest levels of the financial services industry “to protect the integrity of the capital markets, especially the more vulnerable entrepreneurial, growth-oriented stocks,”

The support of other publicly traded companies could be an important step forward toward fixing these big issues that affect retail investors and traders.

The SEC's proposals for greater transparency and competitiveness among market participants would make info on short-selling activity more easily available to the general public. In turn, that could help reduce predatory short-selling practices.

For now, we are waiting to see what happens next.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

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