SEC’s GameStop Report Questions ‘Game-Like’ Trading Apps

WASHINGTON—A trading frenzy in shares of GameStop Corp. GME 1.49% earlier this year should lead regulators to consider whether “game-like” brokerage apps are encouraging investors to trade too much, the Securities and Exchange Commission said on Monday.

The highly anticipated SEC report attributed the episode primarily to a rapid increase in trading by individual investors, many of whom used social-media platforms like Redditto swap ideas and strategies. The agency poured cold water on a number of alternative hypotheses for why the struggling videogame retailer’s share price soared from less than $20 at the end of 2020 to an intraday high of $483 on Jan. 28.

The GameStop episode marked the beginning of the meme-stock phenomenon that continues to affect markets by fueling wild swings in the share prices of some companies favored by individual investors. It prompted days of congressional hearings and focused regulators’ and lawmakers’ attention on broker practices such as using game-like features in smartphone apps and selling customer orders to high-frequency traders, an arrangement known as payment for order flow.

The GameStop frenzy put the spotlight on a growing group of investors who seek and share trading information on social media platforms like YouTube and TikTok. Three investors explain how these online communities are helping them chase the market. (Video from 2/16/21) Photo illustration: Adam Falk/The Wall Street Journal.

The SEC noted that payment for order flow could encourage brokers “to find novel ways to increase customer trading,” including through digital trading apps. The agency has been exploring payment for order flow as part of a broader review of market structure.

“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” the SEC said in Monday’s report.

The SEC found no evidence to support theories that gained traction on social media around brokerage Robinhood Markets Inc.’s HOOD -0.93% decision to restrict trading in GameStop and other stocks popular with small investors.

SEC Chairman Gary Gensler, a Democrat nominated by President Biden, said the episode gave the SEC “an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly and efficient as possible.”

But the agency’s two Republican commissioners criticized the report for straying from a forensic examination of GameStop trading into conclusions about potential regulatory changes.

“In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record,” Republican commissioners Hester Peirce and Elad Roisman said.

“The report, however, 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,” they added.

The SEC said in late January that it was keeping an eye on the events. Mr. Gensler said in May that a report on the episode would be published over the summer. Agency officials haven’t given a reason for the delay.

In other conclusions on potential policy changes, the SEC said shortening the amount of time it takes for brokers to clear equity trades from the current period of two days could make the market less risky during times of heightened volatility. It also said more reporting of short sales—a method of betting a stock’s price will decline—could help regulators monitor markets.

Using data available to regulators, the SEC found that the number of investor accounts trading GameStop on a given day rose to almost 900,000 in late January from less than 10,000 at the beginning of the month.

Purchases of the company’s shares by investors seeking to cover short positions “was a small fraction of overall buy volume,” the SEC said, suggesting that a so-called short squeeze wasn’t the main impetus for the rally.

“Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock,” the SEC said.

The SEC also found little evidence that a similar phenomenon associated with options trading, known as a gamma squeeze, was to blame.

While the trading frenzy tested the resilience of the U.S. stock market, senior SEC officials said key market systems and operations appeared to remain sound throughout it.

GameStop didn’t respond to a request for comment about the SEC’s report.

Write to Paul Kiernan at and Alexander Osipovich at

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