Treasury Secretary Janet Yellen convened a meeting with the nation’s top regulators Thursday, who are continuing to review whether recent volatility in popular, so-called meme stocks, and brokers’ responses to it, “are consistent with investor protection and fair and efficient markets,” according to a Treasury Department statement.
Yellen met with the heads of the Securities and Exchange Commission, Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission to discuss the functioning of financial markets and practices of both investors and brokers in recent weeks.
“The regulators believe the core infrastructure was resilient during high volatility and heavy trading volume, and agree on the importance of the SEC releasing a timely study of the events,” according to the statement. “Secretary Yellen believes it is imperative to uphold the integrity of these markets and ensure investor protection.”
The meeting comes following a months-long social-media campaign by retail investors to drive up the value of heavily shorted stocks like GameStop Inc.
and AMC Entertainment Holdings Inc.
and the recent decision by commission-free online brokers like Robinhood to restrict buying of shares and options in those firms.
Regulators appear to be approaching the case from a number of angles, including applying scrutiny to decisions by Robinhood and other brokers to restrict trading, as well as the potential of coordinated market manipulation on the part of evangelists on social media.
One approach the SEC and the Financial Industry Regulatory Authority may take would be to curtail the practice of payment for order flow, whereby stock brokers are paid to direct customer trade orders to market makers, creating possible of conflicts of interest.
Regulators are also likely interested in how the dynamic of free online margin trading, along with a social-media ecosystem that has fomented wild swings in prices of individual securities, could be interfering with financial markets’ price discovery.
“Perhaps a concern among top regulators is that markets for certain stocks are not currently discovering prices effectively, and that individuals are trading on credit in these markets,” Patrick Corrigan, a Notre Dame Law School professor specializing in securities regulation, said in an email.
“Regulators will analyze whether margin trading, short selling, ‘game-like’ features of certain broker-dealer apps, coordinated manipulation or other factors may be interfering with the price discovery process in stock markets,” he added.
Some analysts caution that despite the Robinhood-GameStop saga gripping Washington in recent days, the most likely scenario is that regulators make small reforms, while significant legislation fails to pass.
“We expect the agency to explore and eventually approve tougher requirements on brokerage disclosures to customers, including making it clearer that firms can halt trading in stocks,” wrote Ian Katz of Capital Alpha Partners in a note to clients earlier this week.
“Congress will talk a lot about the trading frenzy, giving hedge funds a verbal beating,” he added. “Lawmakers will introduce bills, but we’re skeptical that anything significant will become law — unless the extreme volatility intensifies and extends to more stocks.”