Yellen meets with regulators on GameStop volatility and pledges to protect investors
Treasury Secretary Janet Yellen called a meeting on Thursday with the nation’s top regulators, who continue to examine whether recent volatility in popular stocks, say memes, and broker responses to it, “are consistent with protecting investors and fair and efficient markets, ”according to a Treasury Department statement.
Yellen has met with heads of the Securities and Exchange Commission, Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission to discuss the workings of financial markets and the practices of investors and brokers in recent weeks. .
“Regulators believe the core infrastructure has been resilient during high volatility and high transaction volume, and agree on the importance for the SEC to release a timely study of events,” according to the communicated. “Secretary Yellen believes it is imperative to maintain the integrity of these markets and to ensure investor protection.”
The meeting follows a month-long social media campaign by retail investors to increase the value of heavily short-sold stocks like GameStop Inc. GME,
and AMC Entertainment Holdings Inc. AMC,
and the recent decision by commission-free online brokers like Robinhood to restrict the purchase of stocks and options in these companies.
Read more: Lawsuits See Plot In Robinhood’s GameStop Moves, But Pundits Doubt Narrative
Regulators appear to be approaching the matter from several angles, including applying close scrutiny to decisions by Robinhood and other brokers to restrict trading, as well as the potential for coordinated market manipulation by evangelists on social media.
One approach that the SEC and the Financial Industry Regulatory Authority could take would be to restrict the practice of payment for order flow, whereby stock brokers are paid to direct orders from clients to market makers, thereby creating a risk of conflicts of interest.
Regulators are also likely interested in how the dynamics of free online margin trading, as well as a social media ecosystem that has instigated wild swings in the prices of individual securities, might interfere with price discovery in financial markets. .
“Perhaps a concern among major regulators is that certain equity markets do not currently find prices effectively, and individuals trade on credit in these markets,” said Patrick Corrigan, professor at Notre Dame Law. School specializing in securities regulation, in an e-mail. .
“Regulators will analyze whether margin trading, short selling, the ‘game-like’ functionality of certain brokerage applications, coordinated manipulation or other factors may interfere with the price discovery process in the stock markets. “, he added.
Some analysts warn that despite the Robinhood-GameStop saga that has gripped Washington in recent days, the most likely scenario is that regulators make small reforms, while important legislation fails to pass.
“We expect the agency to explore and ultimately approve more stringent requirements for disclosing brokerage information to clients, including making it clearer that companies can suspend stock trading,” wrote Ian Katz. from Capital Alpha Partners in a note to clients earlier this week.
“Congress will be talking a lot about the trading frenzy, giving hedge funds a verbal beating,” he added. “Lawmakers will bring forward bills, but we’re skeptical that all that matters will become law – unless the extreme volatility escalates and spills over to more stocks.”